Industry watchers have been predicting – and companies have been eagerly awaiting – the return of tech IPOs for months. A123Systems’ successful IPO last week set off a new flurry of those forecasts, with many seeing it as a sign of more offerings to come, and a new break through for cleantech IPOs. But at the Renewable Energy Finance Forum West on Wednesday, Pascal Levensohn, founder of Levensohn Venture Partners and a National Venture Capitalist Association board member, called those predictions “wishful thinking.”
While he’s glad to see a few IPOs emerging, they amount to “drops of water in the desert” and are “not relevant to the majority of companies out there,” he said. “I disagree with predictions that U.S. IPOs are about to come back in a meaningful manner. Underwriters are only willing to accommodate a small number of companies.”
The problem is much larger than just the recession, Levensohn says, pointing to a larger trend of a shrinking volume of offerings over the last decade. The average number of technology IPOs have been steadily declining, and in the last few years has been smaller than the number of technology IPOs before the dot-com bubble, he said. A Grant Thornton study expected to come out in October finds that the number of U.S. IPOs actually peaked in 1997 and have slid since then, he said, estimating that more than 22 million potential jobs have been lost as a result of the fewer IPOs.
The challenges include less research and development spending, both from the government and from corporations, as well as the growing length of time it takes for venture-backed companies to go public – a median age of more than 10 years now from 4 years in 1998 – or get bought. That longer timeline makes it harder for venture capitalists to make money and increases the pressure for larger IPOs, he said.
Another big problem has been a series of regulations that have made small public offerings, of $50 million or less, less feasible, Levensohn said. The “death of the under-$50 million IPO” is a huge factor, because while the large IPOs get the big headlines, the small IPOs together accounted for many of the jobs, he said. He pointed to companies that are household names today, including Intel, Yahoo, Adobe, Dell, and Symantec that raised less than $50 million in their initial offerings. Just 17 of these companies, raising only $365 million all together, provide 470,000 U.S. jobs today, he said. “How many [new companies] will be stillborn or relegated into obscurity because they can’t get the capital they need today?”
All of this could spell bad news for the nascent market for cleantech exits at a time when the viability of venture-capital investments for the industry is still being tested. After spending billions of dollars on cleantech companies, the clock is ticking for venture capitalists to make a return on their investments — and prove that it makes sense to put money in this area.
A lack of exits — and returns — could lead to less funding for new cleantech startups as investors see less opportunity to make money on the deals. Many renewable-energy companies require a large infusion of capital to ramp up in the marketplace, once they prove their technology using venture-capital funding, and many of those planned to get that money by going public. A delayed return of IPO opportunities could mean a dead end — or at least a rougher road — for companies poised to reach mass scale.
And aside from IPOs, acquisitions also remain difficult, partly because of the lower values as buyers realize for-sale companies are unlikely to go public and partly because the Nasdaq also has been shrinking, leading to a smaller pool of fewer public companies available to buy other companies, Levensohn added. In any case, in general when companies are acquired instead of going public, jobs are lost, while IPOs create jobs, he argued. “The lack of IPOs is harmful to job creation. I don’t understand why people don’t understand why not having IPOs is a serious loss for this country.”