September 1, 2014

A Bed Time Story Venture Capitalists Tell Their Children

Once upon a time, back in the days of yore, when entrepreneurs went by names like “Jeff Bezos”, Internet retailers were the investment rage, and Harvard still printed a face book of its students on paper, there was a ritual that many venture capital backed participated in. It was called the “initial public offering.”

Now, many of you are young and can’t remember the 1990s, so let me tell you about this ritual. The founders of companies would sell shares of those businesses to the public and the businesses would be listed on the stock exchange.

This ritual, my children, is rarely used anymore. Like other ancient tools like the typewriter and the phonograph, the IPO-as-exit-vehicle has been replaced by a more modern tool: the acquisition.

Dow Jones VentureSource recently released its counts of the number of venture capital-backed companies that exited in 2011, and the numbers tell the story of the lost IPO-as-exit-vehicle. The data show a slight rise in the number of acquisitions of VC-backed companies to nearly record levels (there were 6 more acquisitions in 2004 than there were last year) and a slight decline (by one) in the number of initial public offerings of venture-capital funded businesses last year. Moreover, as the chart below shows, last year the number of exits by acquisitions exceeded the number of exits by IPO by the largest amount since 1992, when Dow Jones VentureSource first began to produce exit data.

For those of you interested in ancient history, this pattern is far different than in 1992, which saw 69 more IPOs of venture capital-backed companies than acquisitions of those businesses.

Source: Created from data from Dow Jones VentureSource

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Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

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  1. Do you think this has to do with the legal complexity of an IPO? It seems to me that all the reports and filings that are needed for an IPO would be a serious hurdle for companies wanting an exit.

    • Between Sarbanes Oxley regulation on the company and SEC/FINRA regulation of securities firms, it is nearly impossible to bring an iPO in this country. Look at Hong Kong, London, and others, and you can see that we have exported this business to friendlier environments. People love to hate “Wall Street” as the engine of evil. It is also the engine of the economy. Capital raising in this country is ever more difficult. “little people” can no longer participate. This contributes to the have/ have not reality. But this is the creation of regulators who must protect the “little people” from investing in risky investments. Since only the rich are allowed to take on risk, only the rich get rewarded for the risk.

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