SecondMarket (EF, Wednesday, Week 11)
entrepreneurial-financeyear-twoBenefits of an IPO:
-- Access to equity capital
-- Liquidity for (1) founders/employees and (2) investors
-- "Currency" for (1) acquisitions and (2) attracting talented employees
IPO market is in decline in last 15 years; small IPO market has basically evaporated. Most transactions used to be <$50M; almost none now. Why? - Change from investment mentality to trading mentality (avg equity holding period: 2 years => 3 months). Caused by decimalization, rise of high-frequency trading. Makes it less attractive to be public (end up with short-term hedge fund execs on your board), need enough publicly-traded equity to absorb volatility.
-- Evaporation of small-cap equity research. Caused by regulatory activity (wall between research and banking; no cross-subsidization), acquisition of small-cap investment banks. Decreases demand for small-cap offerings.
-- Higher direct costs (Sarbanes-Oxley, others). It costs $2.5M to go public and $1.5M per year to stay public (for smaller firms). A lot of smart people think the legislative changes argument is overblown, and that SOX has not been a real deterrent.
Takeaways for a growing business looking for a liquidity event:
Pursue a dual-exit strategy. Prep for an IPO, talk to potential acquirers, think about SecondMarket to establish price for shares (you can always set a floor). Dual-exit => +25% on acquisition price (on average).