We are approaching a pivot point in the Technology Investment Cycle and I want to explore what might happen if the 2012 Technology IPOs are not a resounding success.
With all the doom and gloom in Europe and the US economy bumping along the bottom, this is not the best time to be looking to investors for billions of dollars.
It is estimated that there are around 200 IPOs lining up on the runway like aircraft queuing to take off a sinking aircraft carrier. They are headed by Facebook, valuation $100 billion (and seeking to raise $10 billion) and Zynga, who raised approximately $1 billion, is trading below its issue price (although 4th quarter figures out in January 2012 may change this).
However it is one thing to file for an IPO and another altogether to actually launch it. Of the 119 2011 US technology IPOs, 79 or 66% are trading at a discount to their issues price so the market is already difficult.
What factors are affecting the market?
- the European debt situation,
- the Arab spring uncertainty,
- the forthcoming US and Congressional elections,
- the US budget deficit and
- mooted changes in the US tax code for investors.
None of these factors suggest a healthy IPO market in 2012
Let’s look at the capital flows involved. Most of the companies lining up to go public are VC funded businesses where the investors are seeking a cash exit and using the IPO route to achieve this, even if there is a period of lock up for some of the existing shareholders and Founders/Directors after the flotation.
If these get away, the VCs will be able to demonstrate a successful funding cycle for their existing funds and will return healthy returns to their Limited Partners. In return, these investors will be much more inclined to invest in the next fund raising round when the VCs return cap in hand, reminding them how well they did last time.
The public markets will also provide support and evidence for the high valuations being demanded by the shareholders and this will sustain valuations in the M&A market where a small group of large companies, Apple, Facebook, Google, Microsoft, Amazon are able to pay large valuations for some of the larger corporate properties which become available. Look at Microsoft’s deal for Sykpe at $8 billion.
However if the IPO market does not provide this liquidity, what happens?
I think that there will be a step change downwards in tech company valuations. The small group of mega-sized, well funded corporate acquirors will find a lot less competition for the businesses for sale and the market will switch from a “Sellers Market” to a “Buyers Market”. For smaller businesses, exit options will evaporate. Google recently hired away the top talent from Gowalla which is now effectively dead but they did not buy the company. That must have been an option.
Therefore my major prediction is a deflating of the Technology Valuation Bubble in 2012.
The next consequence of this is a change in the whole VC market with a contraction in the capital available in the market and a reduction in the number of firms. While there will always be some players with capital, the availability of capital from Limited Partners for new fund raisings will be reduced. It will be interesting to see if this will make VCs more collaborative or less collaborative. I don’t know the answer to that.
While I don’t think we are going back to the bust of the post .Com era, many early stage firms will not get the next stage of funding that they are expecting and need and will have to fold or sell their IP cheaply, as Gowalla appears to have done.
Does this make me pessimistic about the start up scene. No it doesn’t. What will happen I believe is that start ups will learn how to get going the Lean Way – see Eric Ries’s book The Lean Start Up (Amazon Affiliate Link), which I referenced in a recent post.
All the technology is availble though the web to get many businesses started at a fraction of the cost 10 years ago. I think Crowd Sourcing will play a role and angel investors will still be important but the companies will focus on getting to revenue and break even much faster with less elaborate solutions – Minimal Viable Product – rather than expend huge resources building an all encompassing solution ready to scale day one. The end goal will be the same but the route to get there has changed.
So to summarise:
- Tech valuation bubble deflates
- VCs show reduced returns to Limited Partner investors
- Next cycle of VC funding is smaller, less capital from Limited Partners, fewer firms
- Reduction in funding available for existing and new start ups
- “Buyers Market” in Technology
- Smarter Leaner start ups, rise of millennials and social entrepreneurship
This reinforces my belief that there will be a steady increase in mentoring, the strengthening of the Lean Start Up movement. With the move away from aggressive price maximisation and increasing influence of the Millennial Generation in business we will see a further increase in Social Entrepreneurship – but we will keep a discussion of that topic for another day.
Please do leave some comments or if you have topics relating to this or anything else to do with the Corporate LifeCycle, please drop me an email – jbdcolley[at]aol[dot]com.
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