John Cambier is managing partner at IDEA Fund Partners in Durham, an investor in 17 companies (one acquired), 11 in the Triangle.
In the past couple of years, an unprecedented number of venture-backed companies have closed financings of $100M or more at valuations above $1 billion. This phenomenon has led to grumbling by some – most notably, Silicon Valley venture capitalist Marc Andreessen – that the “IPO is dying” and that individual investors are “missing out” on what used to be great opportunities to ride exciting young companies from their IPOs onward.
His reasoning is that stifling regulations make it costly and burdensome to run a company with publicly-traded stock. He names Oracle and Microsoft as two examples of companies that went public early and provided a great return for early public shareholders, but likely would have gone out much later in today’s environment.
While the large private financings are happening (selectively) and the regulatory burden for public companies is greater today than it was 20 years ago, the dire situation Mr. Andreessen describes just isn’t reality. For one thing, he completely neglects the biotech field, which has seen 99 IPOs in the last 1.5 years – 47 of those in the first six months of 2014. None of these companies had (product) revenue, and many, if not most, will fail. But to say that individual/small investors won’t get a chance to ride the successes is just not reality.
Let’s take the recent example of InterMune (ITMN), which in February 2014 traded at under $12 per share and just two weeks ago announced its acquisition by Roche at ~$73 per share. Many venture investors would be happy with that 6x return.
If we now go back to tech, which is Mr. Andreessen’s domain, we still find plenty of examples of companies that have gone public early enough in their lifecycle to present an opportunity for a public equity investor to make very healthy returns. To name just a few examples in reverse chronological order during the same 18-month time period:
Hubspot filed an IPO last month with TTM (Trailing Twelve Months) revenue of just over $100M. If we think about Oracle (ORCL) as occupying the far end of the size spectrum for business enterprise software companies, with $38B in TTM revenue, even with a total opportunity just one tenth that size, Hubspot would have the potential to grow by nearly 4,000% over the coming 10-20 years. In doing so, it would likely see a corresponding increase in the value of its shares and thus deliver a meaningful return to its investors.
Mobile Iron (MOBL) IPOed in June 2014 with TTM revenue of ~$100M and a market cap of $900M.
Marketo (MKTO) IPOed in May 2013 with TTM revenue of ~$70M and a market cap of $832M.
ChannelAdvisor (ECOM) IPOed in May 2013 with TTM revenue of ~$60M and a market cap of $462M.
We can even cherry-pick a couple of now-public tech companies that raised large amounts of money from private investors and went out as comparatively mature companies, and have still given early investors the opportunity to make substantial returns. Facebook’s share price, for example, is up nearly 4x over its low of $18 a year ago. Tesla’s shares have grown 10x since its debut only 4 years back and Google, now public for 10 years, has seen its market cap go up 10x during that period.
So, I would propose the following:
1. Remember that even with a new member of the “Billion Dollar Club” seemingly announced each week, these still represent only a fraction of venture-backed companies.
2. The increasing number of large, later-stage financings is as much a reflection of the greater amount and availability of later-stage private capital as it is an indictment of the public company model. After all, who wouldn’t want less work, less transparency and less accountability if you can get it with a compelling valuation?
3. For the average “Main Street” investor, there will continue to be a collection of compelling young technology companies that are changing markets or even changing the world and have shares you can purchase.