WebSideStory postponed its IPO today to after Labor Day. Lindows, an interesting Linux company founded by Michael Robertson of mp3.com fame, has indefinitely postponed its IPO. eCost, a profitable e-commerce company with revenues of more than $100 million in 2003 and profits of more than $6 million has lowered its price-range.
These are three exciting if not promising companies who ought to be able to go public. Perhaps they all will go public eventually. But in my opinion, the bar has been raised too high. The traditional IPO process demands too hot a market so that all the money-hungry hands that want a big piece of the pie can get their cut. In a cool market, there just isn’t enough irrational exuberance to go around.
Today’s “adverse market conditions” keep making it difficult for good companies to go public. But why? Why can’t good companies go public quietly, no matter what the market conditions are? Why does the market have to be so hot?
I like the Dutch Auction approach that Google has just used, which cuts out a lot of the intermediaries. I think if more retail investors were familiar with this process, and if the Street hadn’t created such an anti-Google media frenzy, the stock would have priced north of $100. Google would have gotten what it deserved. As it stands, Google was undervalued. Smart investors who saw past the negativity bought in at $85 and will get a nice ride upwards, north of $135, as Google soars past Yahoo’s market cap. Google is a better, more focused, more efficient company in my opinion. Its growth rate is much higher than Yahoo’s.
I’d like to see more companies by-pass the traditional IPO route and go with the Dutch Auction. I think this approach will succeed if more investors figure out how easy it is to get a bidder ID and bid on shares.
In a Dutch auction, the public sets the price–not the bankers. So why can’t good, decent companies go public, even in adverse markets, accepting a low price if that’s what the public is willing to pay, in order to get the advantages of being public? (Along with the disadvantages)
Who decides when a company’s IPO is postponed? Is it the investment bankers who can’t sell the deal? Is it the board of directors or the company’s management team who don’t want to accept such a low price?
Who loses when this happens? I think mainly the existing shareholders who need liquidity. Who wins? Perhaps nobody, except the attorneys who still have to be paid.
If you have insights know how and why IPOs are postponed, please let me know.
Also, I’m doing more research on reverse mergers with public shells, something I blogged about a few months ago, and Pink Sheets, and I’m going to pull out the book on Direct IPOs that I bought a few years back.
Liquidity is a key ingredient of free markets. Capitalism requires capital. If small and medium sized companies can’t achieve liquidity through public markets, then one major incentive of entrepreneurship is stiffled significantly.
I’m currently reading “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else” by Hernando de Soto.
De Soto claims that trillions of dollars of assets exist in under-developed nations but
“Because the rights to these possessions are not adequated documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment.”
“In the West, by contrast, every parcel of land, every building, every piece of equipment, or store of inventories is represented in a property document that is the visible sign of a vast hidden process that connects all these assets to the rest of the economy. Thanks to this representational process, assets can lead an invisible, parallel life alongside their material existence. They can be used as collateral for credit.”
Turning assets into investable capital is essential for entrepreneurs.
De Soto states that “the single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur’s house.”
If we didn’t own titles to documented property that could be leveraged into capital for business formation, most small businesses in this country probably would never get started.
But similarly, if we can’t transform the assets (including the future value) of existing companies with ongoing operations and real growth opportunities into capital (through public offerings), then much of the growth potential that exists in entrepreneurial companies will not be achieved.
As a typical US Entrepreneur, I have borrowed against my home multiple times, turning that asset into capital, and then utilizing that capital to build companies which produce revenue and profits.
But almost all of the value of the companies I have helped created is completely locked up. Like an undocumented plot of land in the third world, I cannot borrow against my MyFamily.com stock, because the company is privately held (and my founders shares are still restricted).
If I could sell some of my equity, or borrow against it, I would turn around and invest it in new startups which have perhaps more growth potential (at least percentage wise) than MyFamily.com does with its 1,100 employees and market leading status.
But as long as my equity in MyFamily.com (and six other early-stage companies in which I own equity) cannot be turned into liquid assets, the economic growth which I can generate depends on using capital from other sources.
As an entrepreneur, I am becoming more and more obsessed with liquidity, since so much else depends on it.
I think the public markets should be far more open than they currently are. Unfortunately, in this country we are moving in the wrong direction. Because of corruption and lack of ethics, we require legislation like Sarbanes-Oxley, which raises the cost of running a publicly traded company nearly three-fold, according to estimates I have read.
Corruption has brought on legislation which hampers liquidity which stifles entrepreneurship. Our future economic growth depends largely on entrepreneurs. If we raise the bar to liquidity too high, all of us will suffer.