What does a Soft IPO Market mean for Startups & VCs? Nothing

According to a recent Wall Street Journal article entitled “IPO market Flashes Red for Stocks,” Q1 saw only 9 IPO’s raising a total of $1.2bln: this was the softest quarter for IPO’s since Q1 2009 when there were 2 IPO’s raising $830mm.  The article went on to point out particular weaknesses in tech IPO’s: “some high growth tech startups including Etsy and Box remain below their IPO prices” and “some of the most high-profile IPOs that debuted in 2015, including Box and Square, sold shares below the valuations used to price private fundraising rounds.  On the surface, it looks like bad news for big VC’s which depend on IPO’s to facilitate large exists.  So what does this mean for VC’s and startups in general? Probably Nothing.  A few things to note:    

 

- $13bln was raised by venture firms in Q1, which is the most since 2000.  Although there may not be exits right now, venture funds, especially late stage ones, clearly have capital to deploy for companies in later rounds.  VC’s also have a multi-year view so what’s happening today is more of a data point among many data points versus something they react to.   

 

-Very few startups go on to IPO, rather most exit via M&A to a larger acquirer.  The IPO market has little if any bearing on this type of an exit, so as a startup you shouldn’t give it much thought. 

 

-The data below compiled by Renaissance capital shows a soft IPO market may not mean a whole lot for VC’s: i) the data show that VC backed deals tend to drive the market representing on average 48% of deals in 2014 and 2015, so they’re the ones generating a lot of the volume in the market.  If they retrench, naturally the overall IPO market is going to look softer; and ii) the table also shows 2011 was a horrible year for VC backed IPO’s, averaging -10% returns that year.  However, the next three years that followed were excellent with returns of 21%, 41%, and 21%, all of which beat the S&P.  One bad year or bad quarter is no indicator of trends. 

Year

2011

2012

2013

2014

2015

IPO's

125

128

222

275

170

PE Backed Deals

35

45

68

71

39

VC Backed Deals

51

46

82

126

85

Other Deals

39

37

72

78

46

% VC Backed

41%

36%

37%

46%

50%

 

 

 

 

 

 

Median Size ($mm)

$160

$124

$126

$100

$94

IPO Return that year*

-9.8%

20.5%

40.8%

21.0%

-2.1%

S&P Return that year

0.0%

13.4%

29.6%

11.4%

-0.7%

*Calculated as average return from offer price to 12/31 close

 

 

 

In conclusion, while the market for IPO’s may not be strong right now, it doesn’t mean a whole lot for VC’s or the companies they back.           

Blossom Street Ventures. All Rights Reserved.
Web Site Design by Idealgrowth