Some venture capitalists reflecting on the good old 'Google Days'
Facebook's imminent IPO could be the psychological boost venture capital firms need to again brave the public markets for their exits, industry watchers say.
Venture capital firms did an about-face over the past decade, switching to mergers and acquisitions as a way to exit their investments in portfolio companies instead of initial public offerings. The number of IPOs in recent years has been paltry. Indeed, some used IPO registrations more as a signal that a portfolio company was for sale than a true desire to go public.
A successful Facebook IPO could be the nudge that venture capital firms and their portfolio companies need to return to public markets.
“Generally people are very excited, because when large companies like Facebook go public, it makes them reflect on the Google days,” said Jackie Kelley, Ernst & Young's Americas IPO leader, based in Irvine, Calif., referring to Google Inc.'s 2004 IPO, which was a big win for its venture capital firm investors. “Many want to ride the wave.”
There already are some signs of a rebound of IPOs for venture capital companies, especially in the technology sector.
Thirty-six of the 44 companies that went public in the first quarter of this year were backed by either private equity or venture capital firms, according to PricewaterhouseCoopers LLP's IPO watch, released earlier this month.
Facebook — along with other recent venture capital-backed IPOs including Yelp! Inc., Zynga Inc. and Angie's List Inc. — is helping pave the way for other technology companies to launch IPOs, Ms. Kelley said. “Other innovative technology companies are looking to this group as leading the charge,” she said.
Although many companies coming to market are in the technology sector, Ms. Kelley does not see a new tech bubble forming, noting these companies are much more mature. “Companies are sitting in the pipeline longer to make sure everything is shored up,” she said. “On average, companies in the technology space have net losses that are 59% lower and revenues that are 115% higher (than during the bubble). It's a good sign for companies coming to market.”
If Facebook's IPO is successful, it will help to energize the IPO market, Jason Mendelson, managing director at Denver-based venture capital firm Foundry Group LLC, said in an e-mail. Foundry is one of the venture capital firms that backed Zynga, which went public in a $1 billion IPO in December
“I think just having positive stories of successful IPOs helps,” Mr. Mendelson said. “We saw a similar reaction after Google. Bottom line, I think it will create more market demand for tech IPOs.”
Facebook is evidence that the IPO window is open, said David Crowder, vice president, business development, at SharesPost Inc., a San Bruno, Calif., secondary market firm and an adviser to GSV Capital Corp., a Woodside, Calif., publicly traded venture capital firm. Many companies will take advantage of this, he added.
“If Facebook has a successful IPO, it will help keep the window open and it may open it a little wider,” said Mr. Crowder, who was also a founding partner of private equity firm Thomas Weisel Partners and a co-founder of its early stage venture capital subsidiary, Thomas Weisel Venture Partners.
Still, there is doubt whether Facebook's IPO will have “coattails” on which other companies can ride to IPOs of their own.
“Every IPO has to stand on its own. We are thrilled that one of our children is going to go public,” said Mark Heesen, president of the National Venture Capital Association, Arlington, Va. “Our belief is that IPOs don't have coattails. It shouldn't have a dramatic impact on other companies going public.”
Mr. Crowder agreed: “Facebook's IPO alone is not a driver of people's thinking. What is a driver is people's disposition toward IPOs and whether the IPO window is open for private companies.”
Even so, the fact that Facebook is finally pulling the IPO trigger could help to reverse the trend among venture capital firms against using public markets.
The number and amount raised by venture capital firms in IPOs inched up in the first quarter — to 19 IPOs raising $1.5 billion compared with 14 IPOs raising $1.4 billion in the first quarter of last year, according to recent data released by the National Venture Capital Association and Thomson Reuters. Companies are not exactly being rushed to market; there were 60 venture-capital-backed companies in the pipeline at the end of last year.
Taking its time
Like other venture capital companies in recent years, Facebook executives have not been in a hurry to take the social networking behemoth public. Its current registration is more than two years in the making.
“Facebook took so long about even wanting to go public, it did quell other entrepreneurs' desire to go public,” Mr. Heesen said.
Now, however, “Facebook going public, and on top of that the recent enactment of the JOBS Act, does shift the emphasis” toward encouraging IPOs, Mr. Heesen said.
The new law — whose name stands for Jumpstart Our Business Startups — eases regulations on disclosure, auditing and corporate governance for companies with up to $1 billion in annual revenue when they launch an IPO. The legislation was signed by President Barack Obama two weeks ago.
During the past 10 years, mergers and acquisitions of venture capital portfolio companies have dwarfed IPOs. There were 86 M&A deals in the first quarter, more than four times the number of IPOs, according to NVCA and Thomson Reuters data.
As of March 31, there are 50 venture capital-backed companies registered to go public, which Mr. Heesen called a “healthy number.” He added that now, too, “our belief is those that are registered want to go public and are not just to signal for sale.”