October 5, 2022
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RIP: IPO market

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The initial public offering — a vital part of the technology company life cycle — has become a casualty of the recession.

“The IPO market is just dead right now,” said Tom Hopkins, a partner with Sheppard Mullin Richter & Hampton’s Santa Barbara office who has been heavily involved with technology companies. “The typical exits to [tech firms] — the IPO or the strategic buyer — are going to be non-existent in the short term and probably the medium term as well.”

The death of the IPO comes as venture capital investment has fallen and venture investors and private equity firms alike are shifting their money to take care of the companies already in their portfolios. But for young firms that have already gone through four or five rounds of funding and still need to raise additional cash, “It’s pretty dismal,” Hopkins said.

That doesn’t bode well for Thousand Oaks-based Nexsan Technologies’ IPO bid. The company, which makes enterprise-class, long-term storage systems, filed an S-1 last April seeking $80.5 million.

Formed in 1999, Nexsan hasn’t yet turned a profit, according to its SEC filings. It’s racked up $21.9 million in net losses since July 2004, according to its S-1.

Because the company’s IPO bid is still active, Philip Black, Nexsan’s chief executive, can’t discuss his company publicly. But he agreed to speak to the Business Times as an industry CEO commenting on the IPO markets generally.

“In talking to a couple investment bankers who do IPOs only … I think they are waiting to see if there is appetite for IPOs in the second half of this year,” Black said. “It’s not as blatantly closed down as you might think.”
Black continued: “A company that is profitable, or can show they’re be profitable soon, has a decent chance of raising money. They may not have the best valuation, but there will be people out there competing on valuations. The sexy ones will get out.”

Black said he also thinks that new uncertainties about what used to be considered safe investments could drive money toward IPOs. “There’s money out there; it just doesn’t know where to go,” Black said. “The relative risk [of an IPO] has become less compared to a normal day, when you’ve got an IPO on the one hand and General Motors on the other.”

Black disagrees with Hopkins that IPOs will be closed to tech firms for years to come. “This is not going to be a five-year freeze in IPOs, in my view,” Black said, adding that compared to some of the abstract finical instruments invented in recent years, IPOs are “much more normal, un-weird investments.”

Still, the numbers look harsh for any IPO seeker. Only one U.S. firm — Mead Johnson Nutrition — has waded into the public markets this year. Last year, there were only six venture-backed IPOs, Hopkins said, and none in the final quarter of 2008.

Things don’t look good for a company in Nexsan’s position, Hopkins said. “The world has changed substantially [since April 2008]. I don’t even think you can re-price your way to a deal.”

If the death of the IPO weren’t enough, Hopkins said mergers and acquisitions have also died, at least for tech start-ups marketing themselves to strategic buyers. Those kinds of deals have fallen 75 percent in the last year, Hopkins said.

Part of the reason is that private equity has been slammed. Private equity players who used to use leverage for acquisitions can’t find credit. They also have problems in their existing portfolio companies.

“They’re trying to figure out who’s going to live and who’s going to die, and the ones who are going to live, they’re trying to use their remaining cash and credit connections to prop them up,” Hopkins said.

That same trend has shown up in venture capital. Funding has shifted to later and later rounds, with 80 percent of 2008 funding coming in follow-on rounds, compared with just 65 percent in 2003, according to data from PricewaterhouseCoopers and the National Venture Capital Association.

When coupled with the death of the IPO, that trend threatens to end the way tech firms are started and grown in the United States.

Venture capitalists have to put money that would go to new companies into existing ones, and at the same time see their long-term payoff prospects vanish with the disappearance of IPOs or sales. And liquidity has never really recovered since the dot-com bubble burst, said Randy Churchill, director of emerging company services for PricewaterhouseCoopers.

“The problem is that there’s good technology that lacks liquidity, so venture capitalists are forced to fund further rounds of equity,” Churchill said. “That slows the pipeline down.”

But amid the death of the IPO and the freeze of mergers and acquisitions activity, there remains one bright spot, Hopkins said.

“If you’re a company that’s doing OK and has cash, you’re seeing competitors disappear,” Hopkins said.

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