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Summary:

A lot has been written about the venture capital industry and how its problems affect Silicon Valley’s (proverbial) innovation machine. And that certainly is true, but the bigger problem for the technology industry has been the IPO market, which mirrors the pitching average of New York […]

A lot has been written about the venture capital industry and how its problems affect Silicon Valley’s (proverbial) innovation machine. And that certainly is true, but the bigger problem for the technology industry has been the IPO market, which mirrors the pitching average of New York Yankees’ closer Mariano Rivera. This lack of public market liquidity is a much more systemic and longer-term problem, one that was brought home by a research report issued by Jeffries & Co, a small investment bank.

ipoimages1Look at some of the numbers: in 2008 there were nine IPOs in the technology, telecom and media (TMT) sector vs. 77 in 2007. In 2008, there were only six VC-backed IPOS and only one from Silicon Valley. (Check out this excellent discussion among the editors of our partner, BusinessWeek.)

What really is most shocking is the sharp increase in the number of IPOs that were withdrawn in 2008, especially in the TMT offerings. And those who did tap the IPO market could get a forward price-to-earnings multiple of 13.2x, down from a multiple of 33.5 in 2007. Only four IPOs were priced in their range and almost all are under water. According to Deutsche Bank, of 98 tech IPOs still public since January 1, 2006, only nine are above issue and the median stock is down 57 percent from offer.

Much like the objects that appear in the rearview mirror of your car, the paucity of public market exits is a much bigger problem. For starters, it really stymies some of the larger startups with sizable revenues and some profits, and limits their options for creating an exit event that brings in much-needed capital but also rewards the employees.

Back in the day — and I mean long before the dot-com bubble totally destroyed technology’s moral and fiscal compass — it was possible for reasonably sized software, network and chip companies to tap the public markets after spending between four and seven years in the trenches. Those type of deals have vanished, just like the smaller investment banks, such as Robertson Stephens.

I think that’s one of the reasons why we’ve seen a sharp decline in pure tech-type investments in companies building next-generation infrastructure or semiconductors, even though we continue to pivot our lives around the network, thereby requiring a more sophisticated underlying infrastructure.

The IPO landscape is going to resemble a dry river bed through much of 2009. Ted Tobiason, a managing director at Deutsche Bank, recently predicted that “There probably won’t be a great deal of volume in 2009 in any circumstance as it takes time to convert a disbelieving market to a believing market (and believing issuers). But 2010 could be a terrific year.” Let’s just hope he is right, for otherwise Silicon Valley’s problems will keep getting compounded.

ipoimages21

Photo of the dry riverbed courtesy of Flickr by Hickr.

By Om Malik

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  1. This raises a very good point which entrepreneurs seem to be forgetting about company exits: unless you’re planning an IPO imminently, by the time you’re ready the market will be out of the recession. Just don’t collapse too soon.

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  2. I agree with most of this but the drought may also be the results of higher standards before releasing an IPO… people aren’t into all the hype as they use to be regarding tech stocks.

    Jon
    Doubling my money, one stock at a time

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  3. RUNNING A GOOD BUSINESS OR IPO

    While it does not surprise me that many folks are lamenting the lack of IPOs, one must keep in mind that if one is running a business one needs to run a good business (i.e., grow revenue, lower expenses etc.). I am not just trying to state the obvious. Sometimes Silicon Valley companies are so focused on an exit to reward employees, VCs etc. that they forget to focus on the fundamentals of running a business. I understand that technology markets are dynamic, things change and so profits are elusive at early stages. However, one needs to keep in mind that an IPO is actually a financing event, not just a liquidity event – i.e., the goal of an IPO is to raise capital.

    We all hope that new technologies are developed and that therefore capital is available to bring these technologies to market. But also keep in mind that companies need to focus on managing their businesses!

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  4. One the one hand, the underwriter’s climate is badly deteriorated. One the other hand, even if one could seduce a market maker, the public’s appetite for for new issues may have been damaged along with their hunger for regular ole dow stocks. When was the last time we saw the major market indices and gold drop in lockstep?

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  5. [...] IPO Drought Hides Bigger Tech Woes [...]

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  6. [...] IPO Drought Hides Bigger Tech Woes (GigaOm) [...]

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  7. @Alan

    I think you make a very valid point and unfortunately that is very true. I don’t think the market is coming back anytime soon, however, as the last slid shows, we need to think in terms of longer term solutions to these problems.
    Unless we address those issues, there is little chance you can expect VCs to pump money into real-big ideas and instead they will keep pushing money into the marginal startups, that require relatively little cash.

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  8. [...] a matter of debate: Some argue there’s too much money in the space, and others argue that the days of huge IPOs are a thing of the past. One way or another, one result of this downturn could be the culling of venture firms that should [...]

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  9. [...] could be started for less and sold more quickly — but also for less money. As it became tougher to take companies public and deliver outsized returns, some VCs started thinking about how to deliver decent returns even if [...]

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  10. [...] that while we can giggle about the vagaries of technology insiders, the fact remains that the lack of public market exits is a systemic problem that needs to be solved if the technology industry is to return to normal. As [...]

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