IPOs are a strict no no with new technology start-ups

IPOs are a strict no no with new technology start-ups

Lost lustre

The regulations for public companies distract from building a business, said Rob Coneybeer of Shasta Ventures.

That question is growing louder among those who start, invest in and advise Silicon Valley start-ups. “IPO has become a bad word in the Valley,” said Richard Barton, a founder and the Chief Executive of Zillow.com, a real estate site, and a venture partner at Benchmark Capital.

When start-ups grow up, the founders pay back their investors by selling the business to a bigger company or selling shares to the public. Public offerings have long been the more desirable option. They earn the founders and investors more money and the promise of continuing returns, and enable them to keep expanding the company.
Still, in a survey of start-ups by the venture capital firm DCM, only 19 per cent said they expected to go public. Three-quarters said a major barrier was stricter regulations for public companies.

“People don’t want to run public companies anymore because they don’t want to get dragged through the mud,” said Rob Coneybeer, a Managing Director at the investment firm Shasta Ventures. “They’re so focused on paperwork that they can’t focus on building a business.”

In the last two years, only 18 tech start-ups have gone public, compared with 143 in the two years prior. The Sarbanes-Oxley Act of 2002, which tightened corporate governance and accounting rules, has taken a lot of the blame.

Newer restrictions, like those on executive compensation, have made IPO’s even less attractive to some entrepreneurs, said Doug Collom, a partner at Wilson Sonsini Goodrich & Rosati, a Silicon Valley law firm. “Lawyers now have a profound significance in the boardroom,” he said.

Another factor is that acquisitions can produce windfalls for young entrepreneurs but not for the venture capital firms behind them, said Mr. Coneybeer of Shasta, which invested in Mint.com, the two-year-old personal finance site that Intuit bought for $170 million in September. A founder typically owns 10 to 20 per cent of a start-up. If the company sells for $100 million, the proceeds will probably change a founder’s life, he said, but not the venture capitalist’s.

“If we think that they want to flip in the short term, we are less likely to invest,” Coneybeer said. “We are looking for maniacal drive to build $700 million to billion-dollar opportunities.”  Of course, many venture-backed tech companies still want a place on the Nasdaq. Twenty-nine have recently filed with the Securities and Exchange Commission to go public, and start-ups like Facebook, Twitter, LinkedIn, Zynga and Zillow have hinted that they hope to go public rather than sell.  “What young entrepreneurs who sell their companies don’t realise when they take the money is that it’s probably not the best path to create a company that your grandkids are going to know,” said Barton, who founded Expedia, the travel site that went public in 1999. “It’s selling out.” Expedia went public in 1999, said “IPO has become a bad word in the Valley.”