Looking for Love… IPO and the tech sector

VA Angels’ CEO Randy Thompson writes a column for the Calgary Herald. Here is one of the articles.

March 17, 2013. 6:37 pm • Section: Business, Technology

Congratulations must go out the Alberta Deal Generator Angel group and the new-ish junior stock exchange the CNSX. They announced a partnership that is intended to kick start the technology IPO market which truthfully has been dormant for almost a decade. There are other angels that deserve some applause for making this a liquidity alternative for private money, and they include Mike Volker (truly the Gandalf of the formal Angel space in Canada) who has had a Green Energy fund on the TSV for almost five years, and to new comer and super angel Mike Edwards who has given investors a chance to invest in startups in a public vehicle called LX Ventures.

Why is this good news? Well as an entrepreneur you have noticed for some time how stingy the investment community is with their valuation of your endeavor. This is not to go all Kevin O’Leary over your baby, but instead it reflects that for a very long time, almost back to the Internet bubble of the 1.0 variety, liquidity for investors only comes in one flavor. A decade of acquisition, acquisition, and more of the same, with a decade of declining purchase prices to go with the “only one exit strategy” problem.

In 2007, Venture Beat magazine statistics revealed that 75% of all the exits (US Based) in ICT (Information, Communication Technology) and Bio were between $75 and $105 million. Last year at Banff Venture Forum, speaker Randy Smerik noted that 80% of the ICT exits were done by Google, and those exits averaged in around the 20m mark. The other side of that equation is important to note though – in 2007 the average company raised $31 million to get that $100 million exit, and todays Internet and Mobile aps are taking an order of magnitude less than that amount! But the point is still an important one, which angels are reflecting that with only one methodology to get an exit, they as an asset group are giving lower valuations to their portfolio companies.

There is no doubt that Sarbanes Oxley has done a lot of damage to the state of the IPO market, even though it has saved my Grandmother from investing in more Enron. The costs of going public are onerous, the reporting stringent, and the companies we see in the US using the public markets are having to wait until getting a heady market cap before the liquidity of the public markets makes any sense for their investors. Again using US data, in 2012 only 94 operating companies went to IPO, and that includes some major outliers in the tech world such as Facebook, Living Social, Fisker, Yelp and Kayak. I haven’t taken the time to add up the collective market cap of these five companies, but the numbers aren’t small, and in fact companies like Second Market have been created to establish “private stock markets” for private investors wanting out before the billion dollar market cap occurs. I expect we will continue to see more activity in the private stock market space if the rules aren’t relaxed.

In Canada the situation is actually worse. With the large banks now owning the major stock exchange, there is even less of a need to see the regulatory environment go a “little more cowboy”. I think this may be arduous, but one pundit last week went as far as to say that the banks were pushing clients into managed wealth products like mutual funds and away from buying stock, creating a situation where the banks owned the large funds trading the stock as well as the board. In other words, a world of wealth managers as opposed to innovators and new venture developers.

It’s not all doom and gloom, but I wouldn’t expect the IPO market to go back to the heady days of 1997-2001 anytime soon, measured in half decades not years. There are some promising exceptions for angel and private investors, and I am impressed that brokers and private investors are starting to get together more and talk about alternative solutions to the current state. But like the song says, investors looking for love have had the public markets in the “wrong places” category for quite some time. Angels are out looking for the bar where Google or your favourite PE fund is hanging at.

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