There was just one initial public offering (IPO) in Silicon Valley in 2008, the fewest in more than two decades, and shockingly lower than the 28 IPOs a year on average since 1985. IPOs have all but disappeared from the Valley, according to the Mercury News. It’s a disturbing trend because IPOs are a staple of the region’s venture capital industry. They enable successful start-ups to grow into billion-dollar enterprises. And IPOs enable the venture capitalists who funded the initial business to exit in a timely fashion with a fair return on their investment, and to raise new funds and seed more start-ups.
The National Venture Capitalist Association declared an IPO crisis about six months ago, after the second quarter of 2008 passed without a single venture-backed IPO. NVCA President Mark Heesen was quoted as likening the lack of IPOs to “the canary in the coal mine” that signals the presence of poisonous gas and danger.
Without IPOs, venture capitalists must seek exits through mergers and acquisitions, which are rarely as lucrative as IPOs. With M&A activity slowing as well, start-ups are under increasing pressure to hold down costs and wait for a long, slow recovery.
Industry experts differ as to how long the IPO drought will last. Some see it picking up only in 2010, while others are more optimistic. Still others blame the bureaucrats in Washington for killing off the IPO, one of America’s most important engines for wealth.
An article in the Wall Street Journal by Michael S. Malone, a columnist for ABCNews.com and author of “The Future Arrived Yesterday,” documents how IPOs have created many of the great new names in American business, such as Intel, Apple, Google, eBay, Microsoft and Cisco. IPOs reward the founders and early venture capital investors in these new enterprises, and they enable the general public to participate in the success of the growing company.
But new laws and regulations, starting with Sarbanes-Oxley, designed to prevent a repeat of the Enron fiasco, have managed to cripple the creation of new public companies in the U.S. Faced with the overwhelming reporting costs of going public, new companies are opting to sell out to big, existing corporations instead. According to the Journal article, most new business plans in Silicon Valley today end with, “And then we sell to Google.”
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