NEW YORK – You don’t need a panel of venture capitalists to tell you the IPO market is flat and that prospects for a revival are off in the distance somewhere. But that’s exactly what four distinguished professionals discussed at a venture capital forum last month.
Before the market for initial public offerings can begin to show some life, the overall economy must improve, the stock market must show some consistency and public companies must turn in two or three quarters of profitability.
So said a panel of venture capitalists at the forum.
For now, the barrier to IPO entry is rather difficult, the panelists said, unless you’re a spin-out of an established company or have very solid fundamentals (i.e., you’re profitable, with well-regarded management and have a big-name lead underwriter).
“Eighteen months ago the IPO market was hostile to anyone without profits. Now it will look at only those companies with profits,” said Thomas Hirschfeld, managing director with J & W Seligman & Co. Inc., speaking at the sixth annual New York City Venture Capital Conference & Showcase.
Graham Anderson, general partner at EuclidSR Partners, said the legacy of foundering companies like Loudcloud are holding the market back. The Internet consulting company went public in March at $6, and has since dropped to under $2 amid wider-than-expected first quarter losses.
“It’s going to be ugly for awhile,” Anderson said. “The private equity markets are cyclical, always have been, and there are some long nuclear winters during that time. People investing in series C or later rounds are saying [to their companies] You better make this last.'”
Fred Wilson, managing partner at Flatiron Partners added: “The VC market is taking the place of the IPO market – it’s the only place you can get capital. Pricing pressure has lowered valuations across the board and is allowing VCs to make more money. As VCs, we will walk from a deal before paying too high a price. The [VC] industry didn’t employ good enough valuation disciplines in the past and got burned. We won’t let that happen again.”
Glen Lewy, senior managing director of Hudson Venture Partners, said companies must show a path to cash-flow positive before they can expect funded, no matter the stage. What also has changed is that, in [the late 90s], the IPO was the brass ring for these companies. Ten days after going public they were trading at unbelievable levels. The story today is that the IPO is not the end of the story. There is life after the IPO.”
The panelists said it is a good time to be a VC, if you have the patience to build a company over a five- to seven-year horizon.