Lots of prominent venture capitalists, including Fred Wilson and now Bill Gurley, are writing this week about the dearth of IPOs first reported by Matt Richtel in the New York Times. This quarter was the first since 1978 that a venture-financed company didn’t go public.
But the real headline isn’t the dearth itself, but the fact that some of the smartest people in VC are fine with it. It’s like the PGA moved the Masters to a pitch-and-putt, and Tiger Woods applauded the decision.
The argument goes that a public company just isn’t a worthwhile aspiration anymore for Internet or software companies, in large part because of a lions-tigers-and-bears litany of regulations that the National Association of Venture Capitalists is asking everyone to complain about. Bill cites 15 (holy cow!) companies in Benchmark’s portfolio with more than $50 million in revenues, all still private.
“I don’t think we have a demand problem, we have a supply problem,” Bill writes. “No one wants to manage a public company.”
This is a pleasant conceit, that all of us could manage a public company if only we wanted to. But the real supply problem is how many companies can — not how many want to — grow into large, profitable, stand-alone businesses.
In this respect, Bill chose the wrong threshold for companies that could go public. At $50 million in revenues, you would be spending 2 – 4% of revenues (roughly $1 – 2 million per year) on the costs of being public. That doesn’t sound good.
But how many Web 2.0 companies today have a chance of reaching $100 million in revenues, then $500 million? Maybe we have the next Google, eBay, or Amazon among our ranks now. If so, I doubt the new regulations are enough to deter them from growing into public companies.
Characterizing folks who cash out as just smarter or more realistic than those who want to build a stand-alone business seems just as misguided as the 90’s macho insistence on an IPO for its own sake. There are some businesses where M&A makes more sense, and others that can prosper on their own (forget the companies so disruptive or weird that few companies will want to buy them).
M&A today is just a different game of the musical chairs we played in 1999. Who is going to be left to buy technology companies if technology companies stop going public? It can’t just be Google and Microsoft, Yahoo, AOL and IAC forever.
That means we have to keep building business to be businesses, not just to get bought. There are plenty of entrepreneurs who, if they could grow a business to $100 million and beyond, would prefer to keep building it rather than get acquired. The hard part for us isn’t the regulations, it’s getting past $100 million, which takes patience, big thinking, and a huge appetite for risk.
When brilliant folks like Bill Gurley and Fred Wilson start giving up on that project, it’s time for high-tech to get its mojo back.