The summer of 2006 will be seen as the trough for venture-backed IPOs. There are three factors at work:
- The capital markets finally need new blood: Existing tech companies are doing poorly, long-buzzed turnarounds in old favorites like JDS have fizzled, and a combination of defections and acquisitions has shrunk the pool of public companies.
- A new generation of tech companies is generating meaningful revenues, and not getting the valuations it would like in private markets.
- Venture capitalists have capitulated on IPOs, and don’t even bother trying anymore. Given a tiny opening, and they’ll get one in the next twelve months, they’ll unload their entire portfolios.
In 2007 look for IPOs from ad-driven companies like YouTube, Photobucket, and others, much to the chagrin of grizzled skeptics out there.
Here is a graph of some data I looked at earlier today that helped convince me we’re set to see an IPO upswing:
Why was this data compelling to me? Because an IPO window is only partly a function of supply (i.e., IPO-ready companies), it’s also a function of demand (i.e, institutional investors who need more places in which to park their capital). The amount of money looking for liquid returns continues to rise, and yet the total market capitalization is flat. Like a balloon being squeezed, the money has to go somewhere, and one credible hypothesis is that we’re set to see a surprise upswing, however short-lived, in the IPO market.