This AlwaysOn panel, moderated by Victor Boyajian, National Chair, Technology, Sonnenschein, examined the prospects for Tech M&A and IPO over the next two years.
The panelists were: Lise Buyer, Principal, Class V Group Paul Deninger, Vice Chairman, Jefferies & Co Drew Guevara, Managing Director, Morgan Stanley Jamie Montgomery, CEO, Montgomery & Co
Boyajian: What do you think of the markets today? There was not a single tech IPO last quarter.
Montgomery: No one really knows; we all just have our own opinions. Sarbanes Oxley has put a permanent damper on IPOs {Pulse of Tech note: no mention of the fact that investment bankers and vc’s dumped many flawed and weak companies onto the public stock markets in 1999-2000; or that there is likely a price to be paid for that?!).
The complete destruction of the sell-side analyst community amongst the big banks hasn’t helped (echo’ing Frank Quattrone’s comments from yesterday). It is a very tough business and I am not optimistic for the next couple of years until we get some regulatory relief. Montgomery feels “The (IPO) bar is too high and it has big implications on the venture community”.
Deninger: I am sick and tired about hearing about SOX. The VC industry refuses to invest in SOX technology until the company is ready to go public. You can’t wait until you have a $30-40M run rate to start implementing SOX compliance, as all the vc’s do now. The real problem is, nobody has the will to take companies public anymore.
Buyer: It costs $2 to $3M to implement Sarbanes Oxley. If you don’t have that kind of money to implement it, you’re not ready to be a public company.
Guevara: There were 65 IPO’s last couple of years (note: actually there have only been 35 in tech, since 2002). All of them managed to comply with SOX.
Deninger: 65 IPO’s is a crappy IPO market. We’ve had an 8-year sequential decline in the number of companies going public; the number of buyers is shrinking every day.
Buyer: There are times when the public market is willing to take all kinds of risk, and to take these companies public.
Boyajian: I’m hearing that when the markets do open up to IPO, they are likely to be soft for tech IPOs. If this is true what’s the answer?
Buyer: You plan to run the company as a private company and keep it profitable, growing it until it’s ready to be a public company.
Guevara: We live in an age of diminished expectations; the barriers to making a difference on a big scale are much higher. You have to be realistic with your end game; the destiny of the company may be to get sold.
Deninger: (very bearish about prospects for continued healthy M&A market snapping up startups). We need to revitalize the public M&A market.
(discussion of truly miserable state of debt markets…)
Buyer: the only thing tougher than the equity markets right now, are the debt markets.
Guevara: You have to control the burn rate, so you don’t run through your venture funding, before the equity markets open up.
Boyajian: The venture industry is making very nice management fees and have 10 year horizons; they are doing just fine.
Deninger: Physician, heal thyself. If the company is going well, they shouldn’t be fatigued. The vc’s want to sell to a strategic acquirer or take it public.
Boyajian: So if we are talking about longer cycles, what does that mean for the venture industry?
Montgomery: At the end of the day, if you are growing well and are profitable, it’s not a problem.
Deninger: (stating the obvious): I think the venture capital industry is over capitalized. There are not many great tech companies that had more than a few million in vc put into them.
Montgomery: There are also very few vc-backed exits over $500M the past 8 years.
Deninger: {Compared 1996 wiht 2007 vc $ invested vs exits – dismal!}
Question from audience: Is there too much money chasing too few deals?
Deninger: (agreed, but:) “venture capital funds are not going to shrink their fund size (they like the management fees). It is inherently a capital inefficient model. Entrepreneurs might want to seek out smaller vc firms that are small enough to still be interested in putting $2-5M to work”.
Guevara: Part of the dilemma we are all facing is, there is just so much capital out there, it leads to bad behavior. Three competitors which can afford to lose $10M/year can really screw your market up.
Buyer: most venture funded firms fit into three categories: feature, product, or category.
Question about M&A: how does the smaller startup prep itself for M&A?
Guevara: you can’t sell a company; it has to be bought. You can’t missionary sell. There are no hostile sell-side takeovers!
Boyajian: It is a question of timing and building relationships.
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This was a very well informed panel, plenty of wisdom dispensed; but the discussion never really caught fire on any particular aspect. Sparks don’t always fly.
I do find it a bit disengenous for the investment bankers to claim that the IPO market should just open back up and forget so quickly, the massive debacle of 1999-2000! It will likely take
at least another five years, maybe much longer, before trust is restored with IPO buyers — or, a new generation of investors without the scars arrive to buy up the tech IPO’s.