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Many Hurdles to Tech I.P.O.’s Today
Posted by Admin on 2009-08-04 09:35:06

Frank Quattrone was the biggest of the big-name investment bankers during the tech industry’s heyday, handling the initial public offerings of more than 100 companies, including Netscape Communications, Amazon.com and Cisco Systems. A decade later, an I.P.O. is an unachievable dream for most tech start-ups. Mr. Quattrone has some insights into why. (As I wrote in an article Monday, he now runs Qatalyst Partners, a boutique investment bank that advises technology companies mostly on mergers and acquisitions.) From 1992 to 2000, 56 percent of venture capitalists’ successful exits from start-ups were through I.P.O.’s and 44 percent were through acquisitions, according to the National Venture Capital Association. From 2001 to 2008, only 13 percent of the exits were through I.P.O.’s, and in the last year, that has shrunk even more. Public offerings generally make investors and entrepreneurs more money than acquisitions do and enable them to continue to profit from the success of their companies after the sale. So the N.V.C.A. is undertaking a big effort to bring them back. But why did they disappear in the first place? One reason is the heightened bar for small companies to go public, Mr. Quattrone said. Throughout his career, he said, some of the greatest companies he was associated with had $30 million to $50 million in revenue when they went public. Today, he said, bankers require companies to have $100 million or even $200 million in revenue. Investors and bankers have reason to be wary. Tech I.P.O.’s in 2007 and 2008 did not perform particularly well, he said, and investors and bankers are gun-shy in general after the market crash last fall. But Silicon Valley start-ups face unique challenges, Mr. Quattrone said. The shrinking number of big banks -– and bank employees –- has resulted in big banks focusing on big deals for big companies. That means tech start-ups struggle to get their attention. Today, investors have almost infinite choice in technology companies, Mr. Quattrone said, and capturing their interest is trickier than it was a decade ago. In 1990, by his estimate, there were 285 public tech companies with a combined market capitalization of $237 billion. Today, there are 4,500 worth $3.7 trillion. Two-thirds of those companies are tiny, with market caps of less than $100 million. “These companies get no attention paid to them,” he said. “They’re like financial zombies.” Meanwhile, mutual funds have grown so large that it has become meaningless for their managers to allocate tiny sums to small companies. These investments simply do not move the needle, he said. Also, the pool of talented sell-side research analysts has been drained, he said. “There is more friction these days to taking a high-quality company public than there has been in most of the last 25 years,” Mr. Quattrone said.

 
  
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