Above the Crowd

Bleak VC Quarter? Why?

June 30, 2008:

Matt Richtel over at the New York Times wrote an interesting article last week titled, “Venture Investors Wrap Up an Unusually Bleak Quarter.”

The main data point that spurred the article is that this is the first quarter since 1978 that not one venture backed company went public.  I don’t aim to dispute the facts.  This is indeed true.  However, the article goes on to imply that the buyside doesn’t want the companies being backed by VCs.  This perspective is most strongly suggested by Paul Kedrosky, investor and the author of Infectious Greed, “There is nothing that the industry is producing that investors want…The stuff they’re investing in is idiosyncratic — it’s fun and appealing to them but Wall Street doesn’t care.”

Having had several conversations with mutual fund managers in the last three months, I personally disagree with this perspective.  Many funds are starved for growth and appreciation. Many of the leading large capitalization technology companies have seen flat stock prices for as many as seven or eight years. Without a robust IPO market, these investors are not able to balance this lack of growth in their current portfolios. Moreover, the investors themselves lack the exposure to the new trends and disruptions. At a recent Wall Street conference, several investors were visibly upset that the venture community was not bringing more companies public. I feel very strongly there is no a “demand problem” when it comes to IPOs.

So where is the disconnect? If it’s not a demand problem, what is the issue?

If you went back to say 1995 and asked any entrepreneur or tech executive, “what is your one key goal for your company?,” they would all say – “IPO”. This overwhelming desire to be a part of a company that achieved a public offering was universal. It mirrored an athlete going to the Olympics, or perhaps playing in the pros. This passionate desire to be public is completely gone in Silicon Valley. For reasons you could easily list – Sarbanes Oxley; 12b1 trading rules; shareholder litigation; option pricing scandals; personal liability on 10-Q filing signatures – it is simply not much fun being a public executive.

The Benchmark portfolio current has over 15 companies north of $50MM in revenues, and they are all private. This would have never happened in 1995 (even pre-bubble) where most of these companies would ALREADY BE public.

I don’t think we have a demand problem, we have a supply problem. No one wants to manage a public company.

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