Market Downturn Is Good if It Makes VCs More Selective About Companies They Take Public

I’m sure I’ll catch hell for saying this, but maybe the market correction isn’t such a bad thing for slowing down the pace of VC-backed IPOs.

I certainly want to see VC-backed companies go public, since it gives those companies the cash they need to grow and ultimately produces returns for LPs in VC funds. But it’s never a good idea for companies to go public too early.

Looking at this year’s crop of venture-backed IPOs, it’s hard not to conclude that a sizable number of those companies should have waited. As of Aug. 3, the day before the first big market correction, 17 of the 39 VC-backed companies that had gone public were trading below their offering prices. (See table below.) In other words, public market investors believed more than 43% of those IPOs were overpriced.

Clearly, there is a lot of irrationality in the market at the moment, but you can’t ignore the performance of VC-backed IPOs before the first market correction. VCs should be embarrassed that just 21 of the 39 companies they helped to take public were trading above their IPO prices on Aug. 3. (That number fell to 16 on Thursday.) (See table below.)

They should also be red-faced for taking yet another unprofitable company public yesterday: Carbonite. While six other companies tabled their IPOs, including three that are VC-backed, Carbonite’s underwriters slashed the price to “get ‘er done.” The company’s shares closed up more than $2 yesterday, but that was also a day when the Dow surged more than 400 points. I wouldn’t be surprised to see Carbonite get beaten up in the days to come, since the company has never been profitable and has amassed losses of $87.9 million.

Just listen to what Carbonite says in its prospectus: “We have not generally achieved positive cash flow from our operations or reported net income, and we do not expect to be profitable for the foreseeable future.”

And yet it went public in the middle of a sh*t storm.

If the market zaniness prompts VCs to reconsider taking other unprofitable companies public, then maybe it’s not such a bad thing. A slower pace and more discriminate company selection would be good for the venture industry.

(For the record, I am a Carbonite customer and like its online backup service. I just think it should have held off on going public.)


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