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January 25, 2006

Raising Money

No Possiblity of IPO? Who Cares.

Posted by Laura Rich at 2:51 PM

A story in the Wall Street Journal today makes a big stink over the steadily dwindling number of initial public offerings (sorry, paid subscription required) by start-up companies. The numbers are indeed bleak: 2005 saw 41 IPOs by venture-backed start-ups, compared to 67 in 2004 and a booming 250 in 1999, according to data from VentureOne, which tracks that sort of thing.

The Journal sees the slowdown as part of a trickle-down effect that begins with a regulatory crackdown on Wall Street leading to fewer analysts (995 in 2005, compared with 1,420 in 2001), who combined don't have the bandwidth to cover every single public company, leaving more companies out in the cold than before -- since if they are going to spend time covering any companies, those banks are going to make sure they're the most lucrative clients (says the Journal). And if you don't have a big analyst -- or, well, any analyst -- covering your company, you're not really going to make it in the IPO game.

The Journal argues hard its point, with a few more supporting angles:

expensive accounting costs associated with Sarbanes-Oxley discourages companies from going public;

mutual funds are too big to make small investments;

and VC firms are increasingly expecting to exit through merger or sale, not IPO.

Meanwhile, entrepreneurs are doing just fine. Take a look at our Ultimate Valuation Guide to get a sense of all the companies that are cashing in (you can search actual company sale data by type of industry and type of business).

The point is, it's hard to see that things are, really, all that bleak for start-up companies. These days, the money's just not in the public market -- it's the private market where it's all happening. Private placements are on the rise; more entrepreneurs are finding it a seller's market.

One area where it's true it hasn't been easy is carrying the costs associated with Sarbanes-Oxley compliance (one Inc. 500 company cited Sarbox as a leading reason for going private). It's true, Sarbanes-Oxley is not an easy burden to bear, but the accounting costs are generally falling. What's more, regulators have taken heed of small companies' complaints and may make changes to the rules to accommodate smaller issues.

So, sure. The IPO market is not what it was for start-ups. But who really cares? Do you?

3 Comments

Posted by: David Neubert at January 25, 2006 5:52 PM

I would add one more thing. The public (stock) market for small company equities has been going up for years now. The article mentions that mutual funds can't buy small company shares and while this is true, the proliferation of Hedge Funds that focus on small companies has a lot more to do with small companies rising than mutual funds.

Posted by: Daniel M Harrison at January 30, 2006 10:53 AM

I took the priviledge of honouring the question with a post on my weblog:

http://danielmarkharrison.blogs.com/my_weblog/2006/01/ingenious_analy.html

Posted by: Jeremy Wright at March 16, 2006 4:26 PM

I'm not sure I "CARE", but more companies are being delisted from the major exchanges each year than are being listed. Somebody should care.

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