Say that, for the past five or ten years, you’ve poured your life into a startup. Say it’s not consumer-facing and flies just below the mainstream radar. Still, you’ve raised venture capital, picked up clients, and actually gained some traction. Maybe even disrupted something.
People like the product and you’re cashing some checks. You’ve hired a few hundred employees and given them stock. Your revenues are hitting a respectable hundred million or more. You can see a profitable future (or maybe you’re already narrowly profitable). Your shareholders and early employees want liquidity. And new employees? You’re not even giving them equity because you’re starting to near the 500 shareholder mark. Besides, you want to prove to the world that you’re a real, credible company. Should you go public?
If the IPOs of companies like Zillow, Angie’s List and (not-yet-public) Brightcove are any indication, the answer is no. Probably not.
The frenzied, blockbuster IPOs by Pandora or LinkedIn or Groupon simply aren’t available to any company worth less than $1 billion. Meanwhile, solid, successful small and mid-sized companies are stuck in an IPO ghetto, ignored by Wall Street and the media and rarely traded. “It’s hard to tell the CEO of a $400 million market cap company that they’re not ready for the public markets,” said Mark Murphy, head of public affairs for secondary trading platform SecondMarket.
The problem is happening for a few reasons. The prevalence of high frequency trading, which dominates 65% to 75% of all trades, is not compatible with small cap IPOs. “There are hundreds of companies that seldom trade at all,” Murphy said. “That’s worse than having your stock go down.”
There’s also the consumer brand thing. Naturally consumer-facing companies dominate the media attention. I don’t have to point out the difference in media coverage between LinkedIn’s IPO and that of, say Bazaarvoice, an Austin-based SaaS platform for e-commerce product reviews which has more than 600 employees, steady revenue growth, and a path to profitability.
But the consumer brands also dominate analyst attention: Pandora has 21 analysts, LinkedIn has 23. Angie’s List, which has a market cap of just under $1 billion, has 7, Zillow appears to have four. Synacor, a small, Buffalo-based “TV everywhere” company which went public last week, has zero analysts so far. This is blamed largely on the Spitzer Decree, which limited a bank’s ability to support its research department with money from investment banking.
Lastly, there’s the well-documented problem of costs. The most popular complaint is that of Sarbanes-Oxley regulations, which make it too expensive for a small company to operate as a public entity.
The number of small cap IPOs reflects just what a bind these companies are in: In 2008 and 2009 there were venture-backed IPOs than any year since 1985 and IPOs of less than $50 million, which made up 80% of all offerings in the 90s, have shrunk to around 20%. It almost makes me wonder why a sub-billion dollar company, no matter how much an IPO candidate, would force itself out of the gate at all. There are plenty in that situation. There are, by some estimates, hundreds companies languishing on secondary markets, left with the choices of no big payout or selling out, thanks to discouragement from bankers.
The Startup America Legislation, which has support of Obama and the GOP, provides some hope to those in this situation. It includes the creation of an “IPO on-ramp,” which promises to positively change securities regulations for smaller, young companies. If passed, we’ll be watching closely for the effect it has on those waiting in the wings.
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