Over on RWW, Bernard posted about the recent VC round for LinkedIn that gave it a $1bill valuation and some serious cash to play with. In his post, Bernard commented on the dearth of IPOs happening currently and asked what the issue was. Bernard asks;
- Why has the public market for tech stocks disappeared?
- Where has it disappeared to?
- Will it ever return?
Well Bernard – it’s kind of simple. Messers Sarbanes and Oxley nicely kneecapped the public market. Life as a publicly listed company is sufficiently difficult and full of compliance requirements that it’s not surprising that tech start-ups, who need to be nimble, agile and able to turn on a dime are looking for alternative methods of financing. The dot com bubble burst also scared significant numbers of potential investors away from the sharemarket (and especially tech stocks).
The LinkedIn deal shows that PE and VC has replaced a good part of the IPO funding train. As to the long term prognosis for IPOs, at some stage they’ll have to return as PE companies attempt to make a return – they won’t be back in force however until such time as the businesses start to prove financial viability on their own – outside of hype and bubble.
Let’s turn it around and look at why a business lists. Given the current apparent ease of obtaining funding through other means, the primary benefit of public listing is the credibility it brings – unless the business has a particular need for credibility (it wants to trade with businesses that demand it, trust is an issue etc etc) what’s the point?