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.
Look 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What really is most shocking is the sharp increase in the number of IPOs that were withdrawn in 2008, especially in the TMT offerings.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.
Photo of the dry riverbed courtesy of Flickr by Hickr.