Cristina Morgan, Vice Chairman of JP Morgan says “We will take small $50M companies public, but we need buyers. Who will buy these stocks? The problem is not the investment banks and fees, it is the lack of market for small IPOs.”
Giles McNamee, founder of McNamee Lawrence says “It costs $3M to go public, plus 8% fees on the raise, then another $2M a year in SarBox compliance, audit fees, etc. It takes a big company to support that cost. We need a two tier regulatory environment. Having the same rules for General Electric and a small startup is wrong.”
Alan Patricof, founder of Greycroft Partners moderated a session today at Venture Summit East in Boston. It was an All Star panel that included; Chris Pasko, Managing Director M&A Blackstone, Tom Gabel, Head of Equity, Canaccord Adams, Giles McNamee, Founder, McNamee Lawrence, Cristina Morgan, Vice Chairman, JP Morgan, and Chris Bulger, Managing Director, Bulger Capital Partners. There were lots of great insights and quotes, here are a few;
Cristina Morgan “We need to remember it is not a god given right for companies to go public. Many companies should not be public.
Giles McNamee says 99% of liquidity events for venture backed companies have always been M&A. IPOs are reserved for the top 1% of companies. There are 3,000 to 4,000 M&A transactions every year. Not many IPOs.
Giles - “In the UK there is zero capital gains tax for investments in private startups. That would attract capital to small companies.”
Giles - “We are living in a world where private valuations (VCs) far exceed their public valuations. So they can’t go public.”
Alan Patricof - “We need small boutique investment banks, analysts who can follow the stocks, market makers who support the bid/ask, buyers for the stock. When Fidelity pays less than a penny a share to trade stocks…there isn’t enough margin to support all the infrastructure.
Cristina - “Maybe VCs should put together a fund to buy small cap IPOs. Essentially, a public venture capital fund. The problem is not the investment bankers, it is the market of buyers.”
Patricof – “Robertson Stephens, H&Q, and the small boutique firms created the market for small IPOs. They developed the buyers market. We need to get back to that.”
Patricof - “Under today’s conditions Yahoo could not have gone public at the stage they did. Apple, Adobe, etc. could not have gone public either.”
Giles McNamee told me after the panel session that the death of small cap IPOs is complex and has been in decline for many years. One of the problems is the public market infrastructure that has been eliminated over the past 20 years. On line trading where you can buy any stock and any number of shares for $8, took all the profit out of the infrastructure. So, there is no money to pay for market makers to support bid/ask spreads that stabilize the market for a stock. The separation of analysts from investment banking and brokerage has resulted in no money available to support stock analysts on small cap stocks. No analysts means no big buyers of the stock, so they become thinly traded and illiquid. There are several other factors that have contributed to the decline of small IPOs, many of which might seem unrelated. It is a complex problem.
The IPO market for technology companies is bad, and has been since the burst of the dot com bubble. 2008 was the worst year for tech IPOs in more than 30 years. Here are some numbers for the past years.
| Year | Investment | M&A | IPO |
| 2001 | $40.6 | $16.8 | $3.5 |
| 2002 | $21.9 | $7.6 | $2.1 |
| 2003 | $19.7 | $7.5 | $2.0 |
| 2004 | $22.5 | $15.9 | $11.4 |
| 2005 | $23.2 | $17.4 | $4.5 |
| 2006 | $26.7 | $18.7 | $5.1 |
| 2007 | $30.8 | $28.4 | $10.3 |
| 2008 | $28.1 | $13.9 | $0.5 |
| Totals | $213.5 | $126.2 | $39.4 |
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