It used to be that an IPO (initial public offering of stock) marked a watershed moment for venture capital managers, as well as entrepreneurs, helping them cash out their early investment or inject a much-needed source of capital into a successful startup.
But now even the well-respected Gordon Davidson, chairman of the law firm Fenwick & West, and a veteran of more than 100 mergers and acquisitions and some 30 initial public offerings, claims the IPO is on the wane. Instead, a new form of venture capital financing called “DST deals”, named after the Russian investment firm Digital Sky Technologies, is playing a bigger role in funding later-stage startups.
You may recall that DST poured tens of millions of dollars into Facebook and Zynga at critical stages. DST-like deals are essentially private money that is applied to buying shares in the company by investors, venture capital firms or enabling key employees to buy shares.
An article in USA Today points out that DSTs have grown increasingly popular because costs and regulatory paperwork have made it so much harder to go public today. Private DST style investments essentially put off the headaches of going public until a later date, while at the same time, giving the startup additional liquidity.
Some examples of DST type financing include Facebook, which raised $300 million last year from DST and $90 million from Elevation Partners, whose partners include U2’s Bono; Twitter, which raised $100 million from its previous investors and T. Rowe Price, the mutual fund company; and Yelp, a website for ratings and reviews of local businesses, which landed $100 million from Silicon Valley private-equity firm Elevation Partners in January of 2010.
Such private equity investments in late-stage start-ups also let the founding employees cash in on their holdings sooner than they would under the rules for initial public offerings.
Do you think DST-style investments from venture capital firms, hedge funds and wealthy investors are going to replace IPOs, at least in the near future, as a preferred source of capital? Add your comments below.
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