The tech IPO market is dead. It has been for some time now. Maybe the upcoming Skype IPO will be the beginning of the comeback. Then again, probably not. We’ll see.
In the meantime the tech IPO market has been superseded by the acquisition market. And the Social Gaming and Virtual Goods acquisition market is on fire. It seems that every week there’s another acquisition occurring. Google just bought up a number of companies in the space, signaling their entry into the space.
So why has acquisition become the preferred route of exit? For the acquirer, it’s an offset of the expenses and risks of R&D, product development risk, and a guaranteed time to market. For the equity holder, it’s simply an option for a meaningful exit.
And the driver for the frenzy in the Virtual Goods / Social Gaming space? Zynga is at the heart of it, but I’ll leave that for another post.
For the investor (ie. equity holder), IPOs just aren’t what they used to be. Fred Wilson sums it up rather nicely:
First, it is way too expensive to go public. And if you don’t get your offering done, which is not an unusual occurrence, you are left with a huge bill to pay (and no cash to pay it with). And if you get your offering done, your company will likely be valued lower than it would be valued in a late stage private financing.
I used to think that the IPO was the ultimate exit for a venture backed company. Then in the late 90s, I was involved about a dozen IPOs, sat on some public boards, got sued by ambulance chasers, and saw the vast majority of our IPOs underperform and get abandoned by wall street. Since that experience, I’ve become very wary of the IPO exit.
I believe that the IPO exit is appropriate for only the very best companies, maybe one or two companies per fund, which would be the top 5 or 10 percent of our portfolio. For every other company, I think liquidity offerings followed by an eventual sale transaction is the best outcome. The cost is just too high and the benefits are just too low for most companies these days.
The Acquiring Side has the most to gain from this setup. Time to market being the key factor – especially in the lucrative and new world of Social Games and Virtual Goods. Any technology can be built, but being a year or more behind the curve will no doubt truncate potential revenue well into the future. R&D is expensive and risky, so why not leave it up to the entrepreneur to take the initial risk? Product development may be somewhat less risky, but only maybe… acquiring a company that has done the R&D and encompasses the needed product fit is a good option, even if it comes with a slight premium.