Dallas – The initial public offering used to mean fame and fortune for venture capital-funded companies and their investors.
Now, it just means a headache.
As a result, the slump in IPOs by venture-funded firms in 2005 is expected to continue next year.
But the National Venture Capital Association said last week in its industry predictions for 2006 that the federal government may eventually provide some relief.
“The IPO market doesn’t look very promising,” Mark Heesen, president of the association, said in an interview.
So far this year, no venture-backed companies in Texas have had an initial public offering, and national numbers for 2005 are far behind 2004.
Guy Hoffman, president and chief executive of venture-backed software firm Metallect Corp. in Plano, Texas, said financial regulations like the Sarbanes-Oxley Act of 2002 discourage entrepreneurs from going public.
“The governance issues and the compliance issues have taken the bloom off the rose for early-stage companies,” he said. “What early-stage CEO in his right mind wants to be the CEO of a publicly traded company?”
Many venture investors said in the association report that they don’t expect a change in the slow pace of initial public offerings anytime soon.
“The IPO market will remain difficult,” Robert Grady, managing director of The Carlyle Group and chairman-elect of the NVCA, said in the report.
Grady and others noted that mergers and acquisitions continue at a healthy clip.
But venture investors generally turn a bigger profit when their portfolio firms go public, so they’re eager to see the IPO return to prominence.
Heesen said the venture industry is hoping the Securities and Exchange Commission will loosen the financial reporting requirements in Sarbanes-Oxley for small businesses.
“For the smaller companies, it is a huge financial issue,” Heesen said.
Hoffman said the regulations put an undue burden on small firms like his.
“I think what ultimately is going to happen is in an attempt to capture a few bad guys, you not only extinguish the spirit of entrepreneurialism, you extinguish the spirit of capitalism, and you introduce the kinds of bureaucracy that will make America less competitive over time,” Hoffman said.
Grady at The Carlyle Group said he thinks the government is aware of the impact of recent regulations.
“The SEC will promulgate a rule exempting small companies from the most onerous requirements of Sarbanes-Oxley; and if they don’t, Congress will act and do it for them,” he said in the venture association report.
But regulatory roadblocks are only one obstacle to the return of the IPO, Heesen said.
There’s still a limited demand for tech-related IPOs in general, he said, and most young tech firms tend to be venture-funded.
But he said he expects the lingering skittishness from the dot-com collapse to finally dissipate by the end of 2006.
Heesen said the returns from merger and acquisitions should be enough to sustain the industry until the IPO returns.
“I think that there’s so much interest in this asset class right now, and we still traditionally do better than all the other asset classes out there,” he said. “I think most VCs are very content with where things are right now.”
