Founders of venture-backed startups should be building their business to go public through an IPO, but it is far more likely they will get acquired instead, according to former investment banker Steve Fletcher, who is now a managing director in the San Francisco office of GCA Savvian Advisors.
Fletcher, who was a keynote speaker this morning at the Red Herring North America 2010 conference in San Diego, says financial markets have fundamentally shifted away from small cap IPOs. Last year, the median IPO raised $107 million, and as Fletcher puts it, “The days of the $30 million IPO are largely gone.”
The mix of venture-backed IPOs also has changed, says Fletcher. The number of tech IPOs, which was by far the biggest sector not long ago, shrank to 25 percent of the total in 2009, Fletcher says. Healthcare IPOs accounted for 37 percent of last year’s total and “other”—which was primarily cleantech IPOs—made up 38 percent and represented the biggest technology sector. Fletcher was an investment banker at Goldman Sachs for nine years before joining GCA Savvian, an investment banking advisory firm formed in the 2008 merger of Japan’s GCA and the U.S. firm Savvian advisors.
There have been a total of 21 venture-backed IPOs so far this year—including Carlsbad, CA-based MaxLinear—in comparison to 264 in 2000 and 70 in 1990. “We’re now on a pace for 40 IPOs this year, so it’s just a fundamentally different market,” Fletcher says. (Three other companies in the San Diego area that have filed for IPOs are still waiting in the pipeline: Trius Therapeutics, Prometheus Laboratories, and Fallbrook Technologies.)
In contrast, though, Fletcher says there have been far more venture-backed mergers and acquisitions in recent years. In 2009, when there were just eight IPOs, he says there were 326 M&A deals involving venture-backed companies. In 2008, there were 7 IPOs and 380 M&As, and in 2007—before the recession—there were 78 IPOs and 483 M&A deals.
At a time when the market metrics for IPOs tend to be discouraging, Fletcher says the indicators for corporate buyouts are looking good: The S&P 500 has gained 75 percent this year, and companies also have more available cash after cutting dividends, cutting their stock buy-backs, and cutting their employees. “When you combine [the availability of] much more cash with higher stock price and opening of a battened-down hatch, there is more of a ‘let’s get back to work, let’s get goin’ and do some deals attitude,” Fletcher says. He offered this advice to the startup CEOs in the audience:
—Build your company for an IPO, but expect it to be a sale. “As I tell people,” Fletcher says, “We need to build this business like we’re going to own it forever—because if we don’t, we will.”
—Don’t be seduced into taking your company public too early. It can create problems in terms of limited trading liquidity, limited research and trading sponsorship, higher costs, and a valuation penalty.
—The best companies are bought, not sold. By this, Fletcher says he means, “You want somebody to come to you to buy your company.” To accomplish that, he says it’s important to form business development relationships with larger corporate partners, so your company comes to mind when big companies start shopping for acquisitions.
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