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Most Start-Ups are No Match-Up for IPOs


With so much buzz around the financial news’ water cooler about private, well-known companies like Facebook, Groupon, and Skype potentially going public, one would come to the radical assumption that “going public” is a sure thing, right?

Well, that would indeed be wrong. How presumptuous of you to think otherwise?!

Would it instead surprise you to know that going public could mean more harm than good? For many start-up companies, when it comes to the decision on whether to go public or not most choose the latter.

Consequently, economic indicators show that the IPO market has dwindled to record lows since 2000. Dealogic, a New York market analysis company, reported that out of the 196 companies applying for IPO status this year 98 have withdrawn- that is a 26 percent jump in withdrawals from the previous year. In fact, studies reveal that of all U.S. IPO filings, between 15-20 percent are later withdrawn; and these are the ones that get out of the IPO game before it begins. According to Yobie Benjamin of Ernst & Young, 7 of every 10 start-up companies fail before they even begin to reach their IPO. Once a company has officially gone public it’s only a matter of time before they face failure as well (statistically-speaking of course). Likewise, further evidence also shows that for startups the financial condition of the company post-IPO decline.

While there are many reasons for an IPO cancellation, such as from a stifled economy to a poor business model, one thing is clear, the magnitude of withdrawn initial public offerings is an indication of companies now choosing to bail the IPO ship instead of treading its once settling waters.

All this set aside, I figure the point of the argument on why start-up’s fail is that there is confusion about what defines a start-up company in the first place. So if the market is confused, imagine how a company’s managers feel?

What defines a start-up company? How does it get from one stage to the next? Some say its managerial confidence while others say its product concept that’s important rather than company longevity. The Denver Business Journal first posed this question in 2003 and the debate continues. As recent as June 23, 2011, the subject of startup failure was brought up again on PBS’s Nightly Business Report when Harry Lin, a long-time Internet exe, stated, “If youre not trying to create the next Google (NASDAQ: GOOG) or Facebook, youre playing it too safe. Therefore, you wont fail as much, and thats bad.” Furthermore, “If youre taking forever to make decisions or changes to your product or business, youre playing it too safe, and youll probably fail anyway, just more passively. Startup investors look for intelligent, progressive- thinking, aggressive-acting companies. They look for employees whove suffered failure and have learned. They look for ideas and concepts that have not succeeded yet, but have been pivoted toward greater promise.”

Initial public offerings are meant for startup companies as a means to raise capital in order to obtain financial stability. However, the latest companies to go public have been the likes of LinkedIn, Pandora, Zillow, Neilsen Holdings (those who measure consumer product and services such as your favorite television program), and a plethora of others, who have collectively earned $5 billion in capital. Nevertheless, the latest news would suggest that if you are the president of a startup IPOs are the way to go and you should immediately hop on the IPO bandwagon. But, this leads to the question: Why are already large and successful companies going public? And if you’re a small “startup” do you have a chance?

Although the spotlight hovers over large, popular companies going public, the overwhelming certainty of a declining IPO market cannot be overshadowed. In line with Dealogic, Renaissance Capital, an IPO research firm, informs us that from 2002-2006 the average number of IPOs was 213 while the average number for 2003-2011 is 191. Added to this, there were $96.9 billion raised for newly trading companies in 2000 to just under $40 billion in 2010. Also, CFO Magazine reported that, “Grant Thornton [an audit, tax and advisory firm] calculates that it would take more than 500 IPOs per year to grow the number of companies [in order to replace the number of the public companies that have exited the market], and 360 just to replace delistings, volumes that are unlikely ever to occur…”

The article continues to report that companies backed by venture-capital and private-equity firms make up the majority of IPOs and they are becoming increasingly reluctant towards “smaller private companies looking to raise less than $50 million.”

Furthermore, Dan Cummings, head of Global Equity Capital Markets at Bank of America told CNBC recently that, “Companies, on average, are remaining private for 10 or 11 years when during the Internet Bubble “it was more like three or four years.”” He goes on to explain how, “In many cases [investment bankers] were funding earlier- stage companies that may not have been ready for prime time.” The onset of the Internet Bubble bought fourth nearly 1,500 tech companies to go public, raising $114 billion from 1998 to 2000, the CNBC article stated. So far in 2011, the number of tech companies to go public is 33 followed by energy companies at 16. In 2010 that number was 42; and while tech IPOs is the top rated industry at 31%, Financials are next at 15%, Energy at 14%, and Consumer Services with 13% (all data according to Renaissance Capital). Also, the article continued with, “The key issue right now is “people are paying for what they think companies are worth in 2015, not necessarily 2011,” Dan Cummings added. He further stated, “If you look at it from the management standpoint and the venture capitalist standpoint they have very high hopes for the future and don’t want to sell so much today.”

With 73 companies to have filed for IPO registration (and more expected for 2011), at prices above $100 million, small start-ups are being outnumbered in the race for public status. (Hoovers.com)

Activity in the IPO market is being driven by sponsor-backed offerings but it is not enough to sustain and the climate shift from small, innovative startups to large and already-proven success’ makes the initial public offering that much more elusive.

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