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Friday, April 29, 2011

Death of the IPO

We all know the IPO has been dying a slow death since the dot-com crash. While the liquidity that IPOs provide startups was seen as providing a major advantage to US startups, all signs point to the 1980s and 1990s as being an aberration in the long-term economy.

Earlier this month, Barry Silbert of SecondMarket spoke at the Stanford Technology Ventures Program on his new vision for capital markets.

A key 5 minute segment of that was about the “long, slow death of the IPO.” During that segment, Silbert asserted that "I don’t think a lot of people realize that over the last 10 years, the IPO market has been dying a slow death”.

(Actually, most of us who study entrepreneurship are at least dimly aware of this, as are entrepreneurs. A year ago I asked if we had seen the “end of the IPO anomaly.”)

Silbert provided specific evidence of this death. He showed a chart with the IPO rate down by 75% during this century, and almost complete disappearance of small IPOs (under $50m).
He attributes the end of the IPO to:
  • end of research on small cap companies due to
    • end of full-service brokerages (at the hands of Charles Schwab, eTrade etc.)
    • shift from fractional to decimal pricing and thus the end of the bid/offer spread
    • successful litigation against big 10 brokerages by then-NY AG Elliot Spitzer to end incentive compensation for stock researchers
  • Sarbanes-Oxley increase in regulation and costs
  • an explosion strike price class action litigation
The net result is increasing the time to IPO from 5 years to 10 years, which (as he notes) doesn’t work for angels, VCs or employees.

Of course, as the CEO of a secondary financial market Silbert has a stake in all this. The IPO traditionally achieved four goals for young companies.
  1. raise capital
  2. provide liquidity to investors (an exit event)
  3. allow the stock to be used as a currency for acquisitions and employee compensation
  4. and as a branding event
Silbert argues that the secondary markets are providing the first three. Certainly the success of Facebook suggests that this is a route available to highly visible consumer-focused companies.
The rest of the talk is, naturally, why the audience should believe in SecondMarket.

Hat tip: VentureBeat

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