We don't have enough public market acquirers to sustain the start-up ecosystem.
That was the real back story that explains why Google failed to close a deal to buy
Groupon. Groupon wanted to
sell to Google for $6 billion. Of course they did, that is a huge amount of money – real cold hard cash – for a 2 year old
venture. Do you really think they turned that down for the vague possibility of
making more from an IPO in the distant future? Yes we all hear the stories of
visionary entrepreneurs who are such bold risk-takers and some of that is true but
most entrepreneurs don’t love risk, they love eliminating risk on the way to
building a venture. The real story is that Groupon only backed off due to worries that the deal
would fall into AntiTrust
hurdles.
If we only have a handful of acquiring companies (basically today it is Google,
Amazon and Microsoft, now that eBay and Yahoo are wounded), the AntiTrust hurdle becomes more real. Even
if there is no AntiTrust
issue, Google, Amazon and Microsoft simply cannot buy all those venture-backed
companies.
So we need Groupon to go public and use their public
currency to buy other ventures working on local advertising/ecommerce. That will be
good news for lots of ventures. And a Groupon IPO success
will spur on other ventures that are getting ready for IPO.
I don’t know if Groupon really have the solid
financials to go public. We won’t know until they issue their prospectus to the
SEC. Until then we only have rumor and speculation. But if I were a betting man, I
would bet on Groupon being able to go public before
Twitter. And, this will be more controversial, before Facebook. But that as they say is another story. I am not trying here
to compile an actual list of ventures that could IPO in 2011. This is more about the
general environment for IPOs.
This has been what Steve Blank calls the “lost
decade” for tech IPOs. So why do I think that 2011 will be the year this
changes? There are 5 reasons:
- Private
markets are under SEC scrutiny. This takes away the easy option of getting
liquidity without either selling or going public. If you have more than 500
shareholders you have to make your financials public, it is the law. - There is a
backlog of great companies that have the financial strength to IPO. The IPO market
has been pretty well closed for a couple of years (some notable exceptions prove the
rule). So the companies that have the potential to IPO have had more time to grow and
get their act together. - Investors
are hungry for growth outside emerging markets. GDP in America and Europe seems to
have a ceiling at 3% and the Chindia and BRIC stories of
emerging markets growing at 8-10% has created too much capital flowing to those
markets (generating fears of a bubble). So investors want companies in the developed
markets that can grow at really fast pace (at least 30%, ideally 60% plus) from a
base of at least $100m revenue for a long time to come. That has to come primarily
from tech/media ventures. - The
macroeconomic picture is improving. Yes, there are always worries and another
crash is always possible, but "markets always climb a wall of worry" and the general
trends seem positive. But cycles don't last forever, so the people making these
decisions (Boards and their Investment Bankers) will look at 2011 as a good window of
opportunity. - The bean
counters have figured out how to live with Sarbox. For a long time, Sarbanes Oxley ("Sarbox") regulatory overhead has been seen as a reason why you cannot
run a public company. Baloney, as they say in Brooklyn. It is a simple bit of
operational overhead, a rounding error for a great company.
IPO is still the golden ticket. Real entrepreneurs want to IPO. Getting acquired
is a great way to build capital, but it is not the dream of the really driven,
talented entrepreneurs. There are logical reasons for this. The valuation at IPO is
usually (not always, plenty of exceptions to this rule) higher than you can get from
an M&A exit. And more importantly for the
entrepreneur, it is actually often easier to manage public market investors than a
bunch of VC with different agendas. But logical reasons be damned, an IPO is simply
the big badge of honor for the entrepreneur and the investors who back him/her.
It is not clear what we will call the decade that starts in a few days time
– the “teens” maybe – but it will possibly be one where we
get a sustainable IPO market for tech ventures. By “sustainable” I mean
that it cannot be a return to the Dot Com bubble years. Only great companies with
really solid financials will get through the IPO gate. And the valuations will have
to remain grounded in reality (short sellers will ensure that is the case).
Here’s hoping. Happy New Year folks.
One of the most discouraging things about the last two years was seeing swing voters in focus groups, when asked what President Obama's economic strategy was, repeat different versions of "Well, I know he said we needed to save the banks. Beyond that, I'm not sure." When Obama in his first State of the Union gave a vigorous defense of bailing out the banks, saying he knew it about as popular as a root canal, and saying "I get it", it was very memorable to voters. But when his predictions about what would happen when the banks were stabilized -- they would start making loans to businesses, and businesses would start hiring -- didn't happen, and instead the banks gave themselves record breaking bonuses, voters turned on Obama fast. In exit polls on Nov. 2nd, when asked who was most to blame for the bad economy, voters by a wide margin said Wall St. was most to blame, and the voters who said that went Republican by a 14-point margin.
Obviously, saving the banks hasn't been the President's only economic strategy. The stimulus bill, while too small, was an important job creator/saver. Saving the American auto industry was an incredibly important thing to do. Health care reform was in part a long term economic strategy. The infrastructure bank idea is a great potential job creator. Extending unemployment insurance helps keep money in the economy. And all the tax cutting going on is clearly meant to have some stimulative effect, although how much is highly debatable.
However, there have certainly been times where Secretary Geithner, who has been the main driver of the economic strategy, seems to think and act as if helping the big banks and helping the economy amount to the same thing. The tepid reaction to the foreclosure crisis has sure felt that way -- apparently we can't freeze foreclosures or do much to help homeowners because it might "endanger" the banks. In fact, I would argue the exact opposite: that our number one economic strategy right now should be to shift money from the big banks to the real economy, to Main Street businesses and workers and consumers. The big banks are hoarding extraordinary amounts of money, and they are clearly not investing it in job creating businesses. They are speculating with it, they are trading with it, they are investing in complicated financial instruments that do nothing to create jobs- in fact, they are sucking capital out of the real economy that might actually create jobs. These massive financial conglomerates have way too much concentrated wealth and market power, and that is weakening the rest of the economy.
This is one reason why, as I wrote a couple of times last week, it is so important to write down the mortgages of homeowners who are underwater. Taking that money out of the bankers' hands and putting it in the hands of the hard pressed middle class would do more to stimulate the economy than any other thing the President could do right now. This is also why the Federal Reserve's new proposed rule, out last week, on swipe fees is so good. It would generally limit swipe fees to 12 cents per transaction. Right now the average is 44 cents, and with most small businesses it's quite a bit higher. If this rule is upheld, this is money that will go straight from the big banks' profit margins into the main street economy -- all told, probably a $15 billion boost going back to retailers, restaurant owners, taxi cab drivers, and hopefully consumers. $15 billion going from Wall Street, speculative economy into the real economy is a nice lift right now. This is why I have been working with retail business leaders and consumer groups to support this new regulation.
Unfortunately, not all Democrats see it this way. Tom Carper and Mark Warner tried to head off the amendment that made this regulation happen in the Senate, and have been lobbying the Federal Reserve against a strong regulation on the subject ever since they lost the legislative fight. And Barney Frank, who is a great liberal on social issues but spends way too much time with bank lobbyists, was whining on Friday how unfair the proposed rule was to the poor bankers.
Barney, you got this one wrong. Democrats should not be looking out for the bankers, we should be looking for every single opportunity we can to drain the Wall St. swamp. The big banks are hoarding money. They have way too much market power, and when their profits expand, they put that money into the speculative economy rather than the real economy that manufactures goods, sells products and services, and creates jobs. When we take a dollar away from them, and put it into the real economy, there is actually a multiplier effect as people on Main Street spend or invest the money in real products. When mortgages get written down, it helps the real economy. When swipe fees on credit or debit card transactions get lessened, it helps the real economy. If we instituted a transactions tax on every trade made on Wall St, and put that money into a jobs program, that would help the real economy.
The big banks are hoarding our money. Our best economic program right now is to shift money from the banks, and put it into the hands of consumers who might actually buy products and businesses who might actually hire more workers.
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