I believe that there are sustainable, subscription-based mobile data businesses that can provide a rate of return greater than any portfolio based investment. These opportunities are all located in the professional services market for mobile work flow and work order management, and have been horribly under served by the big ERP companies, established mobile applications vendors, and the VC biz.
There are millions of independent, service based businesses that need better mobile apps, and they are willing to pay their 25-50 / mo. in perpetuity to get these services. What a portfolio! For a relatively small investment in a few J2ME apps backed by a hosted cloud type back-end, you can be sitting pretty with 30k subscribers.
Yet, this has been the hardest sell, to potential investors, that I have ever faced.
eldsjal
· 1 year ago
"We've had three exits to date in our first USV fund and none have been IPOs." Fred, to be fair, doesn't that also have a lot to do with the fact that your fund is focused on early stage more than the average VC? Out of the three exits, how many would have been capable of an IPO?
fredwilson
· 1 year ago
maybe one of them. but my point is that M&A is a fine way to generate liquidity if you pay the right valuations going in
awilensky
· 1 year ago
oops, there I go again! Forget that I wrote that - selling mobile apps and systems to the service industry is a stupid idea, obviously. You can delete that comment.
nlevy
· 1 year ago
What situation would compel you or a VC firm to bring out an IPO?
fredwilson
· 1 year ago
i believe that you need a company that is profitable, can consistently grow revenues and profits at least 20% per year, that can command a $500mm market cap or better, that is not subjected to "lumpy revenues and earnings" and has very high visibility into future revenues and earnings.
Michael F. Martin
· 1 year ago
Fred,
Why haven't more U.S. tech startups listed abroad?
fredwilson
· 1 year ago
a few have tried the AIM market in london with limited success. i think its mostly because you want your company to trade in the market its best known. and for US tech startups, that is the US
Michael F. Martin
· 1 year ago
Thanks. That's about what I figured. I guess the discount for being less known is still larger than the premium for SOX. I'm guessing the underwriters aren't cheaper in London.
...I wonder if we'll see some more listings in Hong Kong over the next year or two though
Soren Macbeth
· 1 year ago
Fred,
All great points. I'd especially like to stress your last point - the regulatory environment in the US is horrible. Removing the knee jerk over-reaction to the accounting scandals of Enron et al needs to happen post-haste. We also need to be very very careful going forward to not exacerbate the problem by pushing more regulatory hurtles because of the fall out from the credit crunch and housing crisis.
terra210
· 1 year ago
It is interesting that while the IPO's for companies "backed" by VC's has declined, it seems that a new interest in IPO's has emerged in the form of Hedge Funds going public, like BX and OZM. When I first noticed the BX IPO and then OZM, I wondered why during this time of reduced liquidity in capital markets, would these funds choose to go public? For a sector that usually likes to remain very private, and historically have been unwilling to share any aspect of their investment strategies, why would they now be willing to undergo greater scrutiny? I think this is meaningful...I would love to hear someone's take on it, who is active in the markets.
I understand how VC's would be hesitant to participate in public companies because of the increased regulations. It seems as though transparency is good, and necessary; Enron was a huge fiasco, with a lot of collateral damage. But at the same time, regulations in this sector only leads to smarter work-arounds and more inventions of new, and temporarily opaque financial instruments. Regulation never really results in more transparency. It is foolish to think otherwise. The markets rely on a certain amount of opacity; always have and always will.
It seems like there needs to be a new financial instrument, which supports emerging technologies, and allows for a certain amount of opacity. We need another Lewie Ranieri... ; ).
And at the same time, we need methods available that allow the public to understand the terminology of the markets, so that fears do not become road blocks and laws which constrict liquidity; AND so they can protect their assets through their own informed actions. Since most American's savings and retirement funds are now tied up in the markets, this is no longer something to be ignored.
It seems as though the problem is trying find a way to let markets function, while at the same time not creating an environment where individuals get harmed because they didn't recognize the signs. Legislation which provides insurance, in case something goes wrong is good. But legislation which restricts movement usually has no benefit; for either party.
zeropointzero
· 1 year ago
taxation on partners' carry interest.
Anton
· 1 year ago
IPOs are *so* 90s. You just need to wait around for big media, the "pipe layers", PE, Hedgies or Google to buy your startups. There's still gold in them thar hills!
Simon Cast
· 1 year ago
I don't think IPOs will go away but I do see the rise of other possible methods of exit. You mentioned M&A but that does rely on the existence of a reasonable number of large companies to do the M&A. Given the companies USV has invested in M&A was always going to be a reasonable route.
Another exit that I can see growing in importance is privately traded shares. Here the exit is the VC selling their shares on a private markup to institutional and private wealth funds. It allows an exit to a market but without the regulatory hurdles of the public markets. It could even conceivably act as step to smooth the path to public market.
fredwilson
· 1 year ago
I like that approach a lot and blogged about it a while back
I hope the ³secondary market² for startup founders and investors develops over the coming years
Simon Cast
· 1 year ago
I seem to remember that. That was during the VC is broken meme from last year.
I think I blogged something along those lines too. Well I guess if it keeps coming back up then its probably going to eventuate.
Michael F. Martin
· 1 year ago
I bet it develops first in China.
terra210
· 1 year ago
"selling their shares on a private markup to institutional and private wealth funds"
I agree; this seems to be very likely an expanding model for the US.
gregorylent
· 1 year ago
in edge thinking it is understood that it is not "good for the world" to manage firms with the next quarter's stock price, or exec bonuses, as the criteria for decision making
similarly, the ipo model of "making a killing" has hopefully been discredited as being "good for the world", especially when manipulated, rather than as a result of natural maturation
the pro- argument is that innovation will not occur without incentive, but this represents a misunderstanding of human nature ... you cannot stop innovation no matter how hard you try ... the argument is specious
it is the same in the intellectual property rights world, a total protection racket operating under the guise of being an incentive for development ... the open source movement disproves this
the very definition of "value" is changing, faster than established players can comprehend. this understanding is being forced upon many models of doing business, simply by evolution, and the ipo model is going to lead the way in the experiment of finding a better way to function that is indeed good for the world
David B.
· 1 year ago
I think the dearth of IPO's is more indicative that: a) start-ups are migrating to a much smaller and leaner form, and b) the big fish have realized it's cheaper to acquire early than compete later. And while I personally feel we're months away from a monstrous financial pull-back globally, I think the IPO drought is more about the above changes than anything else.
"There is no venture industry if there is no I.P.O. market," may not be strictly true, but at the same time, I think the venture business has to start earlier and lower if it wants to better compete.
Ian Wilson
· 1 year ago
From another perspective, it disappoints me that Europe (London particularly) did not follow the lead of the US in implementing tighter regulatory controls on the public markets. It would have been better and certainly more equitable if the European markets had also stepped up to the plate and brought their regulatory frameworks to the level of the US for the benefit of shareholders. Only so much business can be lost before Sarbanes-Oxley is scrapped and the next Enron starts to ferment. Thats not good for anyone.
To follow your thread about secondary markets, from an entrepreneurs perspective I certainly find the narrow list of possible exit strategies (required by the investment community) a bit like a straight jacket. Surely there are more options to provide acceptable returns to investors than just IPO or M&A? I hope your conversation here starts to get the whole industry thinking at least.
Liz
· 1 year ago
I think other countries in Europe (Germany) and Asia are ahead of the U.S. as far as integrating cleantech into the culture. At least, I hear more news about interesting uses of cleantech from other countries than I do in the U.S. PSFK.com is always posting interesting international developments in cleantech usage both on an experimental basis as well as on a wide-spread scale.
Steven Kane
· 1 year ago
Hi Fred. Hope you and the clan are enjoying summer travel.
What level of returns might an LP expect from a tope quartile or top decile fund these days? That is, what ballpark of returns are you referring to when you write, "I think we can generate the returns we need to produce to satisfy our investors without a single public offering in our fund"?
fredwilson
· 1 year ago
I don't think in terms of irrs steve. I think we should be able to generate at least 3x on our portfolio gross and at least 2.5x to our lps
The cash comes in over the first five-ish years and goes out over the last five-ish years
That said, our first usv fund is four years old and we've returned about 40pcnt of the fund and we've called about half so the cash flow dynamics can be even better than that
Fred
pedalpete
· 1 year ago
Looking at the numbers you provide above (and maybe I'm nieve) but rather than 'exit' strategies, shouldn't VC funds be looking at 'return strategies' as that is the measurement you use? If a company can provide your returns via profitability, or other method I am not thinking of, should that method not be considered in the investment along with M&A or IPO?
This has been part of the reason I have never spent the time to go through the funding dance, as a start-up, I'm looking at what can make this business profitable, not what can I do so a VC will invest so I can be an M&A target.
I think this is specifically valid in the web market where investment requirements are dropping.
Will
· 1 year ago
Fred I normally agree with most of your points, but I am slightly at odds with the need to roll back regulatory standards. This debate seem to be a long standing issue within the business community in general, but everyone seems to have forgetten the reason for its creation. The Enron Era (which includes firms like Healthsouth and Tyco) to me destroyed public confidence in the markets more then the tech bubble did. We needed these tough regulatory standards in order to preserve the integrity of the financial data presented to the public. You can't just wave a wand and make it dissappear when it becomes a slight hinderance. It would only reaffirm the believe that government simply works for the interest of a few and not the many.
I do understand regulation can become stiffiling to growth if unchecked. However, history has shown us that lack of regulatory standards can and will ultimately lead to corruption, and investors will often flood to where they can recieve a safe return on investment.
fredwilson
· 1 year ago
the regulations are overdone but even worse are the penalties for messing up.
I makes it incredibly hard to find good board members
Plus the board meetings are spent with lawyers and accountants instead of talking about the business
It's overkill and is hurting the companies which in the end will hurt the shareholders
fred
Chris Rechtsteiner
· 1 year ago
It isn't necessarily any 'one thing' that caused the drought in IPO's. Rather, it is a combination of all of the factors you note: a) faster money from m&a; b) horrendous regulatory environment; and my personal favorite; c) entrepreneurs are smarter today than they were in the past.
While you can go public, who wants to deal with all of the headaches of Q/Q earnings projections, analysts hammering the company on any given day based on 'rumors' and litigious activist investors when you can build something great, let it be rolled up into something larger, and then go right back to the drawing board with the next idea.
Seems to me that if you love to build, that is a pretty sweet way to go.
fredwilson
· 1 year ago
Very good point
MDH
· 1 year ago
"that is not subjected to "lumpy revenues and earnings" and has very high visibility into future revenues and earnings"
That's a pretty sweeping statement. If truly a condition of an IPO then not many companies could be brought public. No company is totally immune to lumpiness.
GlennKelman
· 1 year ago
Fred, regulations aside, how many VC-funded companies have a legitimate shot at being long-standing, independent businesses? How many entrepreneurs do you meet that even aspire to to build such companies?
Maybe Sarbanes-Oxley and other regulations have raised the cost of being public to the point where a business now needs to generate $150M rather than $75M in annual revenues before an IPO is worthwhile -- but to me the biggest shift over the past decade in high-tech has just been in lower expectations among entrepreneurs and investors alike.
Blaming SOXA for the IPO drought just seems a little like a cop-out. A lot of startups these days are like very well-paid contract developers, deciding from day one to build an add-on feature to some other company's products. This can be a very lucrative decision, but it's hard to characterize such deliberation as a casualty of SOXA. Whoever builds the next Google or Cisco, Apple or eBay is going to have bigger ambitions than that, and if they succeed, they're going to take it public, SOXA or no SOXA.
Regards, Glenn at Redfin
fredwilson
· 1 year ago
Maybe that post wasn't crisp and clear
I totally agree that IPOs are not the endgame for most of what we fund. I think I stated that in the post
But there are some sectors of VC, like cleantech and biotech, where the capital requirements are so large and the timeframes so great that IPOs become more important in the financing dynamic
In those cases, having a weak IPO market (or a non existent one) is problematic
Its not a problem for me or our firm. But it is a problem and overly regulated financial markets are part of the issue
GlennKelman
· 1 year ago
You're right Fred, I re-read the original post and realized I focused too much on SOXA when your discussion was already broader than that. Thanks for being so gentle in pointing that out.
We both agree that SOXA has (unhelpfully) raised the bar for public companies, and too that recent capital markets have raised the bar a little more, and finally that the dearth of IPOs is bad for the industry. But it would still be fascinating to hear what you have to say about why VC-funded startups aren't growing into large, profitable, stand-alone businesses? Why has the stated endgame changed? Surely regulations wouldn't be the #1 culprit in a root-cause analysis?
At least for the entrepreneurs, it's not just an economic -- or rational -- discussion. The whole reason a lot of people are in this business is for love of building things -- not just products, or features of products -- but building companies, building them to grow and to last.
fredwilson
· 1 year ago
I think some are in it to build a big public company. We have at least three entrepreneurs in our portfolio who very much want to do that.
But back in the 90s, it seemed that everyone wanted that, and then when they got it and realized it was not necessarily a path to the most money, they got smarter.
fred
josh guttman
· 1 year ago
I think the factors contributing to fewer IPOs are many. In the 90s, we used to hear bankers and economists forecasting that the IPO markets are "open" or "closed". Today, I speak to many VCs who would much prefer exiting via an acquisition vs an IPO. I think many entrepreneurs agree. So the IPO markets are not closed due solely to economic circumstance. The entrepreneurs and investors, especially those who were burned on bad deals, are influencing the markets.
Secondary markets for private equity investment are bound to become more efficient over time, giving founders/investors more options (see news of facebook employees putting a block of shares on the market right now). All capital markets should grow more efficient as information becomes more transparent and readily available, giving shareholders more liquidity options and yielding increased opportunity for good businesses. As an investment banker/placement agent, I often had a hard time justifying my role as broker, and could never understand why so much of the financing process hadn't been streamlined more.
Scott Johnson
· 1 year ago
The IPO market has been soft since 2000, and firm and fund size needs to reflect that reality. Sure it would be bliss if the greater fool returned to the trough and feasted, but a VC fund manager shouldn't raise a series of large funds that requires this unlikely event. It takes some discipline to keep fund size small and investment stage early. Work is harder, risk is higher, fees are lower. But that is the only proven model in venture, which has always been a business that can't scale.
fredwilson
· 1 year ago
I agree with you. That is certainly our approach
innonate
· 1 year ago
I think the environment you describe puts an even GREATER emphasis on WHO the VC is (as Charlie and others have written about lately).
There's likely much greater competition in the IPO space, so WHO you know in the banking sector doesn't help or hurt your chances to IPO nearly as much as WHO you know in the corporate world, when it comes to M&A.
All Comments
There are millions of independent, service based businesses that need better mobile apps, and they are willing to pay their 25-50 / mo. in perpetuity to get these services. What a portfolio! For a relatively small investment in a few J2ME apps backed by a hosted cloud type back-end, you can be sitting pretty with 30k subscribers.
Yet, this has been the hardest sell, to potential investors, that I have ever faced.
Fred, to be fair, doesn't that also have a lot to do with the fact that your fund is focused on early stage more than the average VC? Out of the three exits, how many would have been capable of an IPO?
Why haven't more U.S. tech startups listed abroad?
...I wonder if we'll see some more listings in Hong Kong over the next year or two though
All great points. I'd especially like to stress your last point - the regulatory environment in the US is horrible. Removing the knee jerk over-reaction to the accounting scandals of Enron et al needs to happen post-haste. We also need to be very very careful going forward to not exacerbate the problem by pushing more regulatory hurtles because of the fall out from the credit crunch and housing crisis.
I understand how VC's would be hesitant to participate in public companies because of the increased regulations. It seems as though transparency is good, and necessary; Enron was a huge fiasco, with a lot of collateral damage. But at the same time, regulations in this sector only leads to smarter work-arounds and more inventions of new, and temporarily opaque financial instruments. Regulation never really results in more transparency. It is foolish to think otherwise. The markets rely on a certain amount of opacity; always have and always will.
It seems like there needs to be a new financial instrument, which supports emerging technologies, and allows for a certain amount of opacity. We need another Lewie Ranieri... ; ).
And at the same time, we need methods available that allow the public to understand the terminology of the markets, so that fears do not become road blocks and laws which constrict liquidity; AND so they can protect their assets through their own informed actions. Since most American's savings and retirement funds are now tied up in the markets, this is no longer something to be ignored.
It seems as though the problem is trying find a way to let markets function, while at the same time not creating an environment where individuals get harmed because they didn't recognize the signs. Legislation which provides insurance, in case something goes wrong is good. But legislation which restricts movement usually has no benefit; for either party.
Another exit that I can see growing in importance is privately traded shares. Here the exit is the VC selling their shares on a private markup to institutional and private wealth funds. It allows an exit to a market but without the regulatory hurdles of the public markets. It could even conceivably act as step to smooth the path to public market.
I hope the ³secondary market² for startup founders and investors develops
over the coming years
I think I blogged something along those lines too. Well I guess if it keeps coming back up then its probably going to eventuate.
I agree; this seems to be very likely an expanding model for the US.
similarly, the ipo model of "making a killing" has hopefully been discredited as being "good for the world", especially when manipulated, rather than as a result of natural maturation
the pro- argument is that innovation will not occur without incentive, but this represents a misunderstanding of human nature ... you cannot stop innovation no matter how hard you try ... the argument is specious
it is the same in the intellectual property rights world, a total protection racket operating under the guise of being an incentive for development ... the open source movement disproves this
the very definition of "value" is changing, faster than established players can comprehend. this understanding is being forced upon many models of doing business, simply by evolution, and the ipo model is going to lead the way in the experiment of finding a better way to function that is indeed good for the world
"There is no venture industry if there is no I.P.O. market," may not be strictly true, but at the same time, I think the venture business has to start earlier and lower if it wants to better compete.
Only so much business can be lost before Sarbanes-Oxley is scrapped and the next Enron starts to ferment. Thats not good for anyone.
To follow your thread about secondary markets, from an entrepreneurs perspective I certainly find the narrow list of possible exit strategies (required by the investment community) a bit like a straight jacket. Surely there are more options to provide acceptable returns to investors than just IPO or M&A? I hope your conversation here starts to get the whole industry thinking at least.
What level of returns might an LP expect from a tope quartile or top decile fund these days? That is, what ballpark of returns are you referring to when you write, "I think we can generate the returns we need to produce to satisfy our investors without a single public offering in our fund"?
The cash comes in over the first five-ish years and goes out over the last five-ish years
That said, our first usv fund is four years old and we've returned about 40pcnt of the fund and we've called about half so the cash flow dynamics can be even better than that
Fred
If a company can provide your returns via profitability, or other method I am not thinking of, should that method not be considered in the investment along with M&A or IPO?
This has been part of the reason I have never spent the time to go through the funding dance, as a start-up, I'm looking at what can make this business profitable, not what can I do so a VC will invest so I can be an M&A target.
I think this is specifically valid in the web market where investment requirements are dropping.
I do understand regulation can become stiffiling to growth if unchecked. However, history has shown us that lack of regulatory standards can and will ultimately lead to corruption, and investors will often flood to where they can recieve a safe return on investment.
up.
I makes it incredibly hard to find good board members
Plus the board meetings are spent with lawyers and accountants instead of
talking about the business
It's overkill and is hurting the companies which in the end will hurt the
shareholders
fred
While you can go public, who wants to deal with all of the headaches of Q/Q earnings projections, analysts hammering the company on any given day based on 'rumors' and litigious activist investors when you can build something great, let it be rolled up into something larger, and then go right back to the drawing board with the next idea.
Seems to me that if you love to build, that is a pretty sweet way to go.
That's a pretty sweeping statement. If truly a condition of an IPO then not many companies could be brought public. No company is totally immune to lumpiness.
Maybe Sarbanes-Oxley and other regulations have raised the cost of being public to the point where a business now needs to generate $150M rather than $75M in annual revenues before an IPO is worthwhile -- but to me the biggest shift over the past decade in high-tech has just been in lower expectations among entrepreneurs and investors alike.
Blaming SOXA for the IPO drought just seems a little like a cop-out. A lot of startups these days are like very well-paid contract developers, deciding from day one to build an add-on feature to some other company's products. This can be a very lucrative decision, but it's hard to characterize such deliberation as a casualty of SOXA. Whoever builds the next Google or Cisco, Apple or eBay is going to have bigger ambitions than that, and if they succeed, they're going to take it public, SOXA or no SOXA.
Regards, Glenn at Redfin
I totally agree that IPOs are not the endgame for most of what we fund. I think I stated that in the post
But there are some sectors of VC, like cleantech and biotech, where the capital requirements are so large and the timeframes so great that IPOs become more important in the financing dynamic
In those cases, having a weak IPO market (or a non existent one) is problematic
Its not a problem for me or our firm. But it is a problem and overly regulated financial markets are part of the issue
We both agree that SOXA has (unhelpfully) raised the bar for public companies, and too that recent capital markets have raised the bar a little more, and finally that the dearth of IPOs is bad for the industry. But it would still be fascinating to hear what you have to say about why VC-funded startups aren't growing into large, profitable, stand-alone businesses? Why has the stated endgame changed? Surely regulations wouldn't be the #1 culprit in a root-cause analysis?
At least for the entrepreneurs, it's not just an economic -- or rational -- discussion. The whole reason a lot of people are in this business is for love of building things -- not just products, or features of products -- but building companies, building them to grow and to last.
entrepreneurs in our portfolio who very much want to do that.
But back in the 90s, it seemed that everyone wanted that, and then when they
got it and realized it was not necessarily a path to the most money, they
got smarter.
fred
Secondary markets for private equity investment are bound to become more efficient over time, giving founders/investors more options (see news of facebook employees putting a block of shares on the market right now). All capital markets should grow more efficient as information becomes more transparent and readily available, giving shareholders more liquidity options and yielding increased opportunity for good businesses. As an investment banker/placement agent, I often had a hard time justifying my role as broker, and could never understand why so much of the financing process hadn't been streamlined more.
There's likely much greater competition in the IPO space, so WHO you know in the banking sector doesn't help or hurt your chances to IPO nearly as much as WHO you know in the corporate world, when it comes to M&A.
What do you think?