Why Startups Are Embracing IPO Alternatives

A strategic question for startups and their investors is whether the spate of corporate acquisitions of startups in order to obtain specific technologies will begin to abate.

This may begin to occur as technological saturation and increasing facility with big data reduces the current competitive advantage enjoyed by privately funded companies and their innovations. JL

Maxwell Murphy reports in the Wall Street Journal:

This year there have been 96 IPOs, compared with 170 for all of 2015. Those offerings have raised $17.2 billion in 2016, below last year’s $30.3 billion. Market volatility, along with the paperwork and expense involved in going public - it can cost $1 million or more to do the regulatory work necessary to make an IPO - (are deterrents). (And) they fear having to answer to public shareholders each quarter—as opposed to a few private-equity executives.
Companies are losing the urge to go public, despite a buoyant stock market, choosing instead to be acquired by corporate or private-equity suitors.
Cybersecurity company Tenable Network Security Inc. has managed to raise plenty of capital without an initial public offering, and loanDepot Inc. shelved plans for an IPO last year. Craft brewer Ballast Point Brewing & Spirits Inc., meanwhile, sold itself to wine and spirits maker Constellation Brands Inc.
So far this year there have been 96 IPOs, compared with 170 for all of 2015 and the fewest since the financial crisis, according to data from Renaissance Capital LLC. Those offerings have raised a combined $17.2 billion in 2016, well below last year’s tally of $30.3 billion.
Market volatility in some industries, along with the paperwork and expense involved in going public, have kept many companies on the sidelines. In some cases, they fear that having to answer to a diverse crowd of public shareholders each quarter—as opposed to a few private-equity executives—would prevent them from deploying capital quickly or from focusing on long-term goals. What’s more, it can cost $1 million or more to do the regulatory work necessary to make an IPO, according to Renaissance.
“We could be far more aggressive now than we could if we were public,” said Steve Vintz, Tenable’s chief financial officer. Last month the Maryland-based company acquired FlawCheck, a developer of scanning technology for software development, for an undisclosed sum.
While spurning the capital markets, Tenable raised $250 million late last year in a venture-funding round led by Insight Venture Partners and Accel Partners.
Indeed, there is plenty of nonpublic money available. Private-equity funds have over $1.46 trillion in “dry powder,” or uninvested capital, according to data provider Preqin. That’s up from $1.39 trillion at the end of 2015.
“Why would you go public?” said Paul Aversano, head of transaction advisory for consulting firm Alverez & Marsal Holdings LLC. All that pent-up cash offers a safer alternative to the risk of the capital markets.
The S&P 500 index has risen nearly 6.0% this year, but that doesn’t necessarily spell success for a new entrant in the stock market.
Two-thirds of the companies that went public this year are trading above their IPO price, according to Renaissance.
And with large public companies looking to buy growth through acquisitions, many companies have decided that the best exit plan might be a sale. “We did not move forward with our initial plan for an IPO simply because we were instead purchased by Constellation Brands,” said Hilary Cocalis, Ballast Point’s vice president of marketing.
To be sure, some companies are still chancing an IPO. BlackLine Inc., which makes book-closing software for finance teams, went public earlier this month.
“There’s a lot of private capital that’s willing to invest,” said BlackLine CFO Mark Partin. However, a listing “was the goal” for the company and its investors, he said.
While the 2012 Jumpstart Our Business Startups Act lowered the barriers for startups to raise public money, some companies say it sometimes doesn’t pay off. The JOBS Act exempted small companies from some securities-disclosure rules that still apply to larger companies.
“It was a really expensive testing-the-waters campaign under the JOBS Act,” said Bryan Sullivan, finance chief of loanDepot, which withdrew its IPO filing in September. “If you don’t [go public] you still have a lot of bills.”
Though loanDepot. an alternative mortgage lender, is only partly backed by private equity, those investors were willing to be patient when the company abandoned its IPO, he said. “If they weren’t able to monetize other investments in the fund loanDepot is in,” Mr. Sullivan said, “We might have been in a different spot.”
An IPO isn’t off the table. “Going public is definitely a higher probability than selling to someone,” he said, regardless of market conditions. “There is not a ton of other options.”