The IPO Trough for VC-Backed Companies

The summer of 2006 will be seen as the trough for venture-backed IPOs. There are three factors at work:

  1. 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.
  2. A new generation of tech companies is generating meaningful revenues, and not getting the valuations it would like in private markets.
  3. 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.


  1. Paul, are they going to make a run at the IPO market in an act of desperation, or is Wall Street going to open its arms because of a need for deal flow?
    Otherwise, I don’t see the logic behind an 18-month old, ad-driven web property with possible copyright issues going public. Let alone, receive millions of dollars from Wall Street to advance such a business.
    I guess this makes me a grizzled skeptic but as a son of Greek immigrants I learned to trust only one thing when it comes to business. Real products, real customers, real revenues and real profits.
    If YouTube goes public, it will have to be without the benefit of any of these attributes – and that should make all of us nervous. I would much rather see DabbleDB, Freshbooks and other such companies go public and represent this generation of web companies.
    Just imagine the consequences if Friendster had gone public when it was at its peak.
    We can’t afford dot-bomb 2.0.

  2. Sorry, the IPO market won’t come back until Sarbanes-Oxley reform, which won’t happen until the next presidential administration.

  3. I like this prediction – you allude to, but don’t quantify the overall shrinking supply of equities, due to massive M&A and stock buybacks. Simply put, the cost of buying earnings has been cheap, and that has driven down the supply of equities.
    If you have access to that data, a chart would be great!
    So I think your premises for making this prediction are good.

  4. There is still too much venture money chasing too few quality companies. To assume that institutional investors “need” to buy sketchy IPOs is probably a pleasant prospect for some, but I think there needs to be a more compelling justification than excess funds. The instituional investors can find other risky instruments to park money in. The other risky investments may be as bad or worse than sketchy IPOs, but I think the way it works is that they find new mistakes to make rather then repeat the old ones.

  5. TechTrader says:

    John K has it right: the dwindling supply of emerging growth technology companies will drive significant institutional demand for tech IPOs. All of the quality growth small/mid-cap tech companies are being bought by the big players who need growth. Considering they know their markets and they get to do due diligence that provides a look under the covers, they clearly are pointing out a valuation gap in the marketplace.