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IPO Drought: A Crisis for the Start-up Community?

Kim Hart

The absence of a single initial public offering by venture-backed companied has investors quite alarmed. The National Venture Capital Association reported this morning that, for the first time in three decades, zero start-ups went public. Here's the story I wrote about the report.

According to the report, 57 percent of the investors surveyed blamed Sarbanes Oxley regulations, which impose very strict accounting and disclosure standards on all publicly traded companies. Fred Wilson wrote in his blog yesterday that the "risks and hassles are just so great."

In an e-mail I received this morning, Todd Dagres of Spark Capital said, "The data is artificial. Facebook and several other privates could have gone public but chose not to. The issue is overall liquidity. If a private company sells to a public company -- it's similar to going public with less risk."

Sure, being acquired by a bigger public company is a sure payday and doesn't involve the same amount of risk. But several investors told me yesterday that it's often the companies that go public that have the best chance of making it big.

"Imagine the implications if Genetech, Google or Intel decided to forgo a public offering and become acquired because the public market option was unappealing," said Dixon Doll, co-founder of DCM in Menlo Park. "The 'next Genetech or Google' may be making that decision right now."

VentureBeat has it's take here, suggesting that the dry IPO market will force companies and investors to look for alternatives. As of June 20, data tracker Dealogic reported that 41 IPOs were pulled since the start of the year.

What's behind the lack of IPOs? Are the regulations to blame, or the struggling economy accompanied by skittish investors? Does this have entrepreneurs worried?

By Kim Hart  |  July 1, 2008; 11:05 AM ET  | Category:  Kim Hart
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"57 percent of the investors surveyed blamed Sarbanes Oxley regulations, which impose very strict accounting and disclosure standards on all publicly traded companies." Haven't we learned from the Enrons of the world that investors need to be protected from less-than-honest corporate titans whose primary goal is to make themselves richer no matter what it takes. The investment world is only too happy to take the average Joe's money to invest in IRAs and 401Ks and now that so many 'unsophisticated' investors are 'in the market' we need the most protection we can get from predators. If Sarbanes Oxley makes our economic security safer so be it. Moreover, not every company needs to be a public company nor deserves to be a public company.

Posted by: Mike from NYC | July 1, 2008 1:10 PM

Hi Kim:

Nice piece and nice pic, but more analysis is needed. IPO in US has dropped, but relative to what measures and what statistics?

Also, keep in mind that corp acquisition strategies have become popular because of the cash hoards of many established companies. Add to that a fast exit at 40 to 50 times initial investment and you have a nice way to return value to your fund's shareholders and yourself.

Lastly...the deals out today have been under management for 5 years. Remember where we were 5 years ago in 2003/2004? Yes, the ending of a recession of 2000 - 2004. The pipeline could be reasonably thin because if the deal-flow cycle.

Looking forward to more cool pieces.

Posted by: L'Entrepreneur | July 1, 2008 1:12 PM

Your very first line sums it up perfectly: "According to the report, 57 percent of the investors surveyed blamed Sarbanes Oxley regulations". I have personally seen SOX cost our company well over $1B in additional compliance issues. If I were to take a company public it certainly wouldn't be in this country.

The Feds "threw out the baby with the bath water" on this one. Instead of adequately prosecuting those who broke the law they have made doing business in the US significantly more complicated and costly for everyone. SOX compliance has a significant impact on a company's profits.

Posted by: Anonymous | July 1, 2008 2:12 PM

SOX is old news. Sure we hate it, but we've been living with it - and paying for it - for years now. I don't think it has much to do with current dynamics.
I think the entrepreneurs are skittish and should be; can anyone predict how successful an IPO would be on any given day the way they could 2 years ago? How many investors will shift current safety holdings for liquidity with which to grab up riskier IPO stock in this jumpy bear market?

The mood in the investment community seems to be "waiting for the other shoe to drop"; not a good IPO mood.

Posted by: LALA | July 3, 2008 1:46 AM

I understand the concern of the investors who are looking for "start-ups" going public in Wall Street, but see a little around... We are living in the land of the "survivors"... The economy walks slowly and the eyes are abroad... Who will begin a business in the Silicon Valley..., when all the big technology players are wooing young professionals in China, India, Brazil, Russia or other emerging countries??? The BRIC phenomenon doesn't help to reverse the economic negative factors inside... Also, countries as China and Russia have the own way to start businesses... Of course, big technology companies from all these countries come to Wall Street for more investments, but they are not "start-ups".


Posted by: Domingo A. Trassens | July 5, 2008 12:53 PM

I believe the real issue here isn't financial, yet rather the potential impact on innovation. A healthy and thriving technology community is dependent upon VC contributions.

And it's more than the money they manage. VCs are prudent risk-takers and provide the funding, counsel and insight that makes innovation possible.

I write about this in my blog:

Posted by: Marc Hausman | July 8, 2008 11:00 AM

At a recent private conference, a top-tier VC GP gave a great case from his own portfolio of a company that was rising fast and had a shot at putting a real challenge to the Microsoft Office franchise. He and his partners tried very hard to get them to go public and remain independent, but the founders just didn't see the value in all the overhead, when compared to a buyout offer. They were acquired. Like others, I've added my two cents on the topic at

Posted by: Christopher Griffin | July 8, 2008 1:46 PM

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