Editor’s note: Sandy Miller is a general partner at Institutional Venture Partners. He co-founded investment bank Thomas Weisel Partners and served as a senior partner at Montgomery Securities. He has long and deep experience in the tech IPO market.
In early January 2014, there was a widespread concern that the IPO window was going to snap shut. But the chilling IPO winter transformed into an early blossom, and the market rebounded.
Recently, the soul-searching and spirited talk about the long-term health and sustainability of the IPO market has included much discussion of the benefits brought by the JOBS Act, which the Securities and Exchange Commission rolled out two years ago to encourage emerging growth companies to file for IPOs. But is it working?
Recent quarterly numbers from the National Venture Capital Association (NVCA) indicate there is indeed a healthy market for new public offerings, although the market is still a long way off its historic highs of the mid-to-late 90s. In the second quarter, 28 venture-backed IPOs raised $4.9 billion, a 45 percent increase, by dollars raised, compared to the previous quarter, according to the Exit Poll report by Thomson Reuters and the NVCA. It was the fifth consecutive quarter that saw 20 or more venture-backed IPOs. However, this was still far below the strongest three-month period for new listings, which was the third quarter of 2000. Observers are now watching the delayed IPOs for Alibaba and Box, calling it a litmus test for the market.
In 2009, the tech IPO market was struggling; only 13 companies went public, including OpenTable and Fortinet. Since then, however, the IPO market has been boosted partly by the 2012 JOBS Act. While some, including academic researchers, have claimed it’s hard to credit the act for the improved IPO marketplace, from my perspective it has had a very positive impact for CEOs who are readying themselves to take their companies public. Benefits of the JOBS Act are undeniable and here are three reasons why:
- It enables a company to test the waters before making their prospectus public and starting a road show. This allows companies mulling an IPO to meet with leading institutional buyers to gauge their interest in the contemplated offering. Although I’ve come to the realization that many CEOs aren’t aware of this essential component of the JOBS Act, it offers the option to meet with public investors to get initial feedback prior to the actual roadshow. That’s invaluable input.
- The new rules provide emerging growth companies the chance to confidentially file for SEC review. Previously, companies had to file publicly and release a wealth of sensitive information to competitors, customers, suppliers and its own broad employee base. For example, it is rare in a private company for the low-ranking employees to know the compensation package of the CEO; in a public company, everyone does. The CEO could not be sure that the IPO was realistic so was cautious about pursuing an IPO. Now that sensitive information only becomes available when the company is about to begin the road show, after having done pre-market testing of the waters. This risk reduction is a big plus for CEOs.
- The JOBS Act exempts new emerging growth companies from the internal-controls audit and some financial reporting required by the Sarbanes-Oxley Act until the company is a more mature public company. It reduces the costs and internal distractions of the IPO preparation process and the company’s early public life.
Through the last 14 years, the tech IPO market has been far behind the period of the mid-1990s and the bubble years: It was slow, and IPOs became unfashionable. This is a negative feedback loop. When fewer companies go public, startup CEOs have fewer role models to guide them and, as a result, fewer startups go public. And so on. With a number of successful tech IPOs in the last couple of years, including Twitter and Marketo, this cycle has changed, laying the groundwork for a more robust IPO market.
So what’s still missing in this IPO market equation? There is a need for more rigorous research of the tech industry, especially small and midcap tech companies. Many of the best research analysts have left for the buy side given the bureaucracy driven by the well-intentioned, but ultimately misguided, separation of research and investment banking.
It is time for a re-evaluation of this separation and creation of a more nuanced, balanced approach that would enable investment banking firms to deliver a more complete product offering.
There is a need for more rigorous research of the tech industry, especially small and midcap tech companies.
Looking ahead, I see the structural pieces in place and a tech IPO market with good legs under it. My expectation is that tech public offerings in future years will be 2X the current levels based on the high quality of scaled, venture-backed companies and the demand from institutional investors.
Over the past 50 years, Silicon Valley has witnessed great innovation and seen companies rise from humble origins to industry giants. There’s no doubt in my mind that, in recent years, the JOBS Act has helped to spur the IPO market forward and will continue to do so. As the old saying goes, “From small beginnings come great things.”