We welcome David Weild and Edward Kim, co-authors of the recent Grant Thornton study, "Why are IPOs in the ICU?" David and Edward will offer their candid and provocative views on the IPO market in this first segment of a two-part series.
David is a Senior Advisor to Grant Thornton, a Global Six Firm.He is the former vice-chairman and executive vice-president overseeing the more than 4,000 listed companies of The NASDAQ Stock Market. David spent 14 years in a variety of senior investment banking and equity capital markets roles at Prudential Securities.He was recently invited to participate in NYSE's and National Venture Capital Association's Blue Ribbon Regional Task Force to explore ways to help restore a vibrant IPO market and keep innovation flourishing in the United States.
Edward Kim is a Senior Advisor to Grant Thornton in Capital Markets. He was head of product development at The NASDAQ Stock Market and has worked in equity research at Robertson Stephens, equity trading at Lehman Brothers and investment banking at Prudential Securities.
Sound off on this week's buzz in the Comments Section.
David and Edward, your paper was published at the end of last year and was presented to the NYSE and National Venture Capital Association's Blue Ribbon Regional Task Force which was organized to make recommendations to the Obama Administration regarding changes that will help restore the IPO market to the success it had in previous years. Will you share with us what the response has been to your paper and to its suggestions for reinvigorating the IPO market?
We've had extremely positive feedback from members of the venture, issuer, equity capital markets and regulatory communities. One highly-regarded former head of the Division of Market Regulation at the SEC said that it was the best paper he'd read on the subject in over a decade. A recently departed very senior member of the SEC told us that he believes that our recommendations are politically viable. The Chairman (Dixon Doll) and President (Mark Heesen) of The National Venture Capital Association adapted some of our materials in their "4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry" (released on April 29/30 of 2009 and posted on the NVCA web site) and used one of the charts from this paper to demonstrate the catastrophic loss of the small IPO (and the preservation of the large IPO). Still, I think the paper has not yet received the exposure it should have because it came out at the height of the credit crisis, the Detroit bail-out and the transition to the Obama Administration.
One important and gratifying consequence is that our content is being used to inform the strategic planning discussions of companies and exchanges that are trying to develop solutions to this crisis. So, the Paper is making a mark, slowly but surely.
We've received so much valuable input and encouragement that we've been asked to publish a second edition of the White Paper this summer with updated data through June 30, 2009.
Since your paper was published, there have been some signs of life in the public market with two venture capital-backed companies going public in the past two months. Do you think this could be the beginning of a positive trend for the IPO market?
This is a trickle when we need a flood. We fear that people have become so resigned to terrible IPO markets that when they see a merely poor IPO market, they mistake it for "Happy Days." Remember that we had just endured two consecutive quarters of no venture-backed offerings in the 4th quarter of 2008 and the 1st quarter of 2009. That's the first time in the 30 years in which the NVCA has been recording data that we've had no such deals. So, 2 venture-backed IPOs is better than 0, but it's a long way from the 150 or more venture-backed IPOs per year that we should be enjoying (to say nothing of the 300 or more non-venture backed IPOs) that would convince us that we were getting back on track. This is a market structure problem pure and simple. Market structure kills the economics required to provide quality research coverage, capital commitment and sales & marketing support to small cap stocks (the market that most IPOs price into).
Some believe that there are many high-quality companies in the pipeline, ready to go public as soon as they can. Do you agree with this opinion?
We not only agree with this view, we know it to be true. We've met many of these companies, and we've seen their numbers. We've advised some of them and their venture capitalists. There are great companies with rapidly growing revenues (even through the current recession) and real earnings - many of which should already be public.
However, the problem is that the bar has been raised so high to go public. Many companies just don't make it because the aftermarket support that was afforded by the old higher trading spread and commission structure is gone. Did you see the sale of E Ink to a Taiwanese company? E Ink is the company that supplies technology to eBooks like the Kindle. This is a classic example of a really interesting company that has a blow-out quarter and is swallowed. In prior decades, it would have been a marquis public offering; today, it's just another sapling harvested before it can reach maturity.
FYI - the median IPO done through May of this year was a $163 million deal. The smallest was OpenTable at $69 million in gross proceeds. There hasn't been one deal done in the sweet spot (where 80% of deals used to be done) of the old IPO market (sub $50 million) because market structure doesn't support small companies any longer.
Give us a market that supports small IPOs ($10 -$50 million), and we'll show you a market with hundreds of quality companies going public.
In your paper you state that "the lack of an IPO market has caused venture capitalists to avoid financing some of the more far-reaching and risky ideas that have no obvious Fortune 500 buyer." Would you expound on this notion and its long-term ramifications to our economy?
The first question most VCs ask an entrepreneur today is, "Who am I going to sell your company to?...What's my exit?" This means, that if a venture capitalist sees an opportunity to create an entirely new industry, especially one that is capital intensive, it's less likely that they will take that risk because there are no natural buyers for the company. In the "old days" venture capitalists could depend on the IPO market. Think about it: If we were at the dawn of the semiconductor, biotech or personal computer era and the IPO market was dysfunctional the way that it is today, do you think venture capitalists would have made those bets? The world would be a very different place. and not for the better.
What do these companies have in common? Intel, Amgen, Oracle, Starbucks, Yahoo. Besides being extraordinary corporations obviously, each of their IPOs raised less than $50 million and had a market cap under $350 million on day 1. Would any of those deals been successful in today's market? Which companies of tomorrow are we killing today before they ever have a chance to become great?
One of us was invited to a brainstorming dinner recently that was hosted by some of the most successful venture capitalists in the country. It was very clear that the loss of the IPO market is making it impossible to raise the large amounts of capital needed to fund drug development through Phase III clinical trials. Clearly, the fall-out will be that we won't have the progress in medicine that we might otherwise have had. One of these venture capital luminaries quipped, "It's been 579 days since the last biotech IPO. not that I'm counting!"
David and Edward, we look forward to your joining us next week for Part Two of this interview series.
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