InsideVenture Banks on New, Hybrid IPO Model

nyseFor venture investors, it’s not easy to find liquidity these days. Despite a handful of new listings, technology investors with stakes in midsized growth companies are wondering if the warm IPO market of past years will ever return, even if it never approaches the heights of the wild late-1990s boom era again. Now, one Sand Hill Road-based startup, InsideVenture, has launched a platform designed to make it easier for companies to go public by joining late-stage private investment with the IPO, creating the so-called HPPO (“hybrid public private offering”) model in an effort to provide liquidity while stabilizing aftermarket performance.

InsideVenture CEO Mona DeFrawi says the new method could “bring back the IPO of the 1990s,” and while that seems like an overstatement to me, the model could soon open a window for growth companies in a certain class, including well-financed, profitable tech startups founded in the early to middle years of the current decade. Conservative institutional investors may be attracted to the model as well, as it affords a chance to cultivate a relationship with an IPO candidate while it’s still private. But it’s still an experimental model, and someone will have to go first.

InsideVenture plays an advisory role for startups while linking them with a community of long-term investors and investment banking partners, according to DeFrawi. The firm launched a direct market for investment in late-stage venture-backed companies last fall, and is now encouraging them to consider a hybrid offering as well. The new model involves complete and typical SEC compliance and regulatory filings, bringing in an 80 percent financial commitment from its community members, which are committed long-term investors. The remaining 20 percent goes to retail investors. Many of those long-term stakeholders — typically late-stage venture firms, public portfolio managers and selected strategic investors — “would have been in private rounds anyway,” according to DeFrawi, and provide some insurance against the volatility that comes from having too many short-term investors.

No company has registered for such an offering yet, but InsideVenture announced the new model at this morning’s NYSE bell-ringing with three companies by its side. They included online investment adviser Financial Engines, software product development platform creator GlobalLogic, and secure collaborative workspace developer IntraLinks — all potential candidates for hybrid offerings.

Going public is still very costly and requires full transparency, and structural changes, such as Sarbanes-Oxley, since the late 1990s have made it far more difficult to conduct an offering. What’s more, DeFrawi acknowledged that companies using InsideVenture’s hybrid model will probably still have to conduct secondary offerings at a later date. Other alternatives have also begun to arise for late-stage private companies, such as Tim Draper’s XChange, a private market for illiquid securities. But DeFrawi said InsideVenture’s new model will allow more small to midcap companies, valued at well under $1 billion, to step into the public markets and gain liquidity with some reduced risk in the aftermarket period, potentially returning a new class of companies to a lean IPO marketplace.