Private Equity vs. An IPO
The mood on Wall Street is still not favorable for IPOs. So, what are successful young tech companies—and their investors—to do? How will they cash in on that big payday? Many employees went to work at some of these companies for very low wages plus stock in the company, which they expected to cash in on IPO day. Now, instead of months from startup to IPO, it is taking years.
In the meantime, many employees are holding stock they deem worthless, because there is no market for it…and that doesn’t make happy employees. Someone at the National Venture Capital Association said, “You want entrepreneurs hungry, not starving.”
Also, many Venture Capitalists are not happy with the long wait for payday. They have fund investors they have to keep happy, and they normally do that through the IPO…but not lately.
Well, things are looking up. Large Private Equity firms are stepping in and laying out cash for employee stock, as well as helping some of these tech firms continue their growth. Here are some recent examples of private equity deals that have—at least partially—replaced the IPO for now.
Facebook — Russia’s Digital Sky Technologies kicked in $200 million and promised another $100 million to buy employee shares and give the company some cash to grow on.
Twitter — T. Rowe Price put up $100 million so Twitter could invest in much-needed servers and equipment to keep up with burgeoning traffic.
Yelp — Elevation Partners put $100 million into Yelp, 75% of which will be used to buy employee’s stock.
Zynga — Game developer Zynga took $180 million form DST. A portion of this money was used to buy out employee’s stock.
These are only examples of some of the larger deals that fast growing tech companies are putting together with private equity firms. So, if your company is a potential candidate for an IPO and you—and your investors—are just waiting for the timing to get better (it may be a long wait), you may want to take a look at some partial stock sales to a private equity firm.
Venture Capital–The Reality
Mainstream media, in its search for bad news, seems intent on trying to lead readers into thinking that Venture Capital today is all but non-existent…and that any entrepreneur who is looking for VC money is on a fool’s errand. However, let’s look at the reality of Venture Capital investments.
Obviously, there are fewer IPOs during the present turmoil and condition of the stock market, but this simply means that Later Stage companies will have to wait a while longer before cashing in on their big “payday.”
The good news is for startups. Investment in Seed Stage companies increased substantially in 2008, with a 19 percent jump from the prior year. There was also about the same investment in Early Stage companies during 2008 as there was in 2007.
Money invested in Clean Technology grew more than 50 percent in 2008, and investments in Internet-specific companies remained at about the same level as 2007. VC investments in the categories of Energy, Media and Entertainment, and IT Services grew during 2008, while several other categories remained about the same level as 2007.
It is true that; overall, the total amount of VC money invested was down about 8% in 2008–due largely to a decline in Later Stage and Expansion investments. This is likely due to everyone waiting out the stock market before they crank up the IPO machine again. Total number of deals in 2008 was only down about 4%.
So, with the President arranging for more capital to become available to loan to small businesses, Congress pumping up the economy, and Venture Capitalists continuing to invest at close to their normal rate, there should be no reason for entrepreneurs to put off starting a business, or growing a business. Put aside the fear and get on with it!
U.S. Falling Behind in Innovation–Part I
It was bad enough that the U.S. traded its manufacturing might for quick profits by outsourcing outside the country, but now it looks like our knowledge-based economy is faltering under global competition as well.
A report just released by the nonprofit, nonpartisan, public think tank, Information Technology and Innovation Foundation (ITIF) indicates that innovation in the U.S. is rapidly falling behind the rest of the world. The study currently places the U.S. in sixth place in the world, and running at a pace that will place it even lower over the next decade.
There have been many studies made over time, as well as more recently, that place the U.S. as the world leader in innovation. However, those studies have been based on opinions, interviews, and surveys. This report by the ITIF is the first to approach innovation from a scientific perspective, using 16 indicators to study innovation and competitiveness. These indicators fall into six broad categories:
- Human capital
- Innovation capacity
- Entrepreneurship
- IT infrastructure
- Economic policy
- Economic performance
Not only did the ITIF study place the U.S. in sixth place in the world for innovation and competitiveness, but the study also determined that all of the other 39 nations/regions studied have made faster progress toward the new knowledge-based innovation economy in recent years than did the U.S. The study shows that the U.S. has made the least progress of the 40 nations/regions in improvement in international competitiveness and innovation over the last decade. The U.S. is dead last in this category.
This should come as no surprise, since the National Academies published their landmark study, “Rising Above the Gathering Storm,” back in 2005. It warned then that America’s lead in science and technology was “…eroding at a time when many other nations are gathering strength.” It appears their warning has come to pass.
What is happening to the greatest industrial nation in the world? Have we allowed greed and avarice to cloud our minds, so we can’t see beyond the next payday? Are IPO’s more important than innovation? Is shareholder value more important than spending profits and dividends on R&D and innovation? Are our industrial leaders so intent on filling their pockets, they have lost their way? Has our government (under the guise of public interest) regulated the heart out of those companies that could best put the U.S. back in the role of world leader?
The ITIF study presents six things that need to be done by the U.S. (or any nation/region) to improve their innovation and competitiveness. I will present these six things as part II in my next post. Watch for it.
Venture Capital – I
Venture capitalists rely primarily on an Initial Public Offering (IPO) for their big payday, but now, because of the recession, that window has been slammed shut. Does that mean venture capitalists are temporarily out of business?
Absolutely not, according to a recent report by PricewaterhouseCoopers. Venture capitalists have simply modified their strategy to accommodate the current economic conditions. As a result, U.S. venture capital investing has remained within historical norms through the third quarter of 2008. In fact, venture capitalists entered into more deals in the first three quarters of 2008, than in the same three quarters of all years since 2001. The trend for venture capital investments is up…and so should be the spirits of any company looking for venture investments.
In addition, the major changes the venture firms are making are likely to work better for most new companies, such as:
- The life cycle of the average investment is now longer (due to lack of IPO exits). Earlier venture investments were planned to end in four or five years—now they are looking at eight or nine years. This means that venture firms may invest additional capital, over a longer period, to assure continued growth of your company until “payday.”
- On the front end of the life cycle, the venture firms are typically investing sooner in the seed and early stage start-up phase. This means they may initially invest smaller amounts than they might have in prior years. This is good news for many ready-to-start companies.
Of course, the requirements for acquiring venture capital is about the same as they always have been—that is, a great idea, and an outstanding management team. Oh yes, you also must have a willingness to work harder than you ever thought you possibly could. Venture capital is not for everyone, and it is very difficult to obtain, but for those companies that need a sound investor to help grow their business, venture capital is necessary—and available.
The time has never been better for new company start-ups, and in future posts I will be giving some guidelines on how to prepare to seek venture capital.
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