On Sunday, SF Gate reported an interesting trend two decades in the making. Instead of IPOs, startups look to be acquired.
SF Gate says this trend is a result of the deteriorating economy. According to the National Venture Capital Association, only 38 venture-backed companies have gone public this year.
That’s nearly half the companies that went public in 2007.
Another study co-authored by David Weild of GrantThornton accounting firm looks at the decline of IPOs over the past two decades.
In the 1990s, there were roughly 500 IPOs per year; most companies were valued at $50 million or less. Compare that to the 2000s: IPOs dropped by 75%, but the valuation of these companies increased.
Why have there been fewer IPOs at higher prices?
Weild traces it back to a few major changes:
- Growing popularity of electronic trading in the 1990s.
- New rules from the Securities and Exchange Commission, which took profit out of stock brokerage options and destroyed incentive from brokers to sell small stock offerings.
- IPO ecosystem became “too successful for it’s own good.”
- Tech and biotech startups often went public with the help of four small investment banks– Alex Brown, Montgomery Securities, Robertson Stephens and Hambrecht & Quist– which were all acquired themselves by 1999.
- Congress dismantled the Glass Steagall Act of 1933. SF Gate explains that this act had “enforced a legal separation between Wall Street-oriented investment banks and Main Street-focused commercial banks.”
The decline of IPOs has conditioned entrepreneurs to believe that business success means getting acquired by companies like Google and Facebook.
One entrepreneur, Jon Fisher, sold his company to Oracle and wrote a book, Strategic Entrepreneurism. His book instructs other entrepreneurs on how to get bought. “The IPO market doesn’t work, and the acquisition market has never been more attractive,” he says.
An Ernst & Young report shows there is plenty of VC and private equity cash to make an increasing number of acquisitions possible, so the popular exit strategy may be here to stay.
Brent Gledhill of small investment bank William Blair & Co also thinks this trend has staying power. His company “has buyers for small IPOs, but can’t get sellers until VCs regain the courage to bring their business to smaller firms like his that would like to be the new horsemen of the IPO market.”
If companies continue to vie for acquisitions, Weild says the results on our economy could be disastrous. Job creation will continue to suffer because young companies aren’t able to rely on Wall Street to finance growing businesses. And studies show more than 80% of job growth at companies occurs after an IPO.
So startups, is it your goal to get acquired? Think hard about your exit strategy– maybe even dare to be different.
Read the original article from SF Gate here.
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