Are Silicon Valley companies shying away from IPOs?

Wall Street’s obsession with short-term results a factor.

By American Bazaar Staff

NEW YORK: It appears that the Silicon Valley startups’ interest in raising money through initial public offerings is fading as the CEOs of technology companies appeared to be worried over the Wall Street’s increasing focus on the quarterly numbers. However, there are those that believe that the current phase may be only a temporary phenomena and more technology IPOs could be seen in the second half of the year.

The fear of startup executives is quite understandable. The intense scanning of the quarterly results and the resultant impact on the bourses has forced them to change their game plan. Instead of having a well laid-out, long-term goal, the listing of shares after the IPOs has shifted the focus somewhat to sub-optimal long term actions.

In 2012, IPOs from the Silicon Valley represented 13 percent of all U.S. IPOs, which included international registrants.

The biggest disappointment last year was undoubtedly the Facebook IPO. Zynga, a gaming company which depended on the social network, too, failed to cheer investors. Their performance in the bourses served as a cautionary tale.

For the Silicon Valley startups, entering an IPO was a prestigious milestone and its response indicated the success of the company.

Another factor that contributed to dampening their enthusiasm for IPOs is tightening of regulation by the Securities Exchange Commission.

While the startups still need money to fund their growth, they now prefer to tap private investors such as private equity and venture capitals.

One of the companies that took this route is SurveyMoney, which raised $800 million from Tiger Global Management and Google, among other investors.

Its CEO Dave Goldberg told Reuters recently that technology investors should acclimatize to the changing conditions now and adjust their priorities. He also pointed to pension funds, which provide a 10-year investment cushion for private equity and venture capital funds.

For late stage financing, private secondary transactions seems to be generating more attraction. This allows existing investors and company employees to divest their shares to new investors, thereby reducing the option of depending on an IPO.

However, for startups with big clients, IPO is a first option as it bumps up the confidence. This is because of the fact that such firms need cash if they have struck a deal of 3 to 5 year period.

Interestingly, the number of venture capital companies based in the Valley has gone up to account for 37 percent of the nationwide total. This is significant because during the halcyon days of the tech boom, in 2000, it was only 28 percent.

Similarly, the Valley’s patent registrations share among the U.S. companies has also gone up. It reached 12.5 percent in 2011 from 9.1 percent in 2001 and just 3.6 percent in 1990, indicating the growing importance of the Valley companies in the global technology map.

Looking from the market capitalization angle too, five technology companies from the Silicon Valley occupy among the top 10 with more than $1.1 trillion in market capitalization.

Interestingly, seven of the best 10 technology venture capital companies last year were based in Silicon Valley. This is both in terms of number of deals done and the number of exists, be it IPOs and acquisitions.

While the current indication may suggest a growing preference for private investments, the fact remains that private investors too will be offloading their investments either through an IPO, or acquisitions at one point of time or the other.

Nonetheless, the CEOs of companies preferring private investments are spared of the headaches resulting from an IPO, if it fails to enthuse investors, or it fails to perform creditably in the bourses.

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