Full article reprinted from Start-Up July 7, 2009
A group of private enterprises are working to revive the moribund IPO market for venture-backed start-ups. Read more...
Full article reprinted from Start-Up July 7, 2009
In the past, venture capitalists generally had as much control over the window for initial public offerings as they did over the weather. The openings for public offerings would come and go, depending mostly upon macroeconomic qualities that either seeded rain clouds or cast them away. Venture capitalists acted accordingly, making their hay on the public markets when the sun shined, knowing they had no control over the storm clouds' eventual return.
Deep in its second year of rainy days and cloudy skies, the venture capital industry--including many in the life sciences--is trying to take some control over its own fate. This is a particularly troubling IPO drought, because it hasn't just impacted one industry as has happened in the past, suggesting the need for systemic changes. And change is coming. At their April meeting, leaders of the National Venture Capital Association outlined a four-pillar plan to reinvigorate the IPO industry: encourage boutique and big investments banks to underwrite smaller IPOs; rewrite tax codes to foster entrepreneurship and investment; loosen regulation for smaller publicly traded companies and, finally, create new potential liquidity paths.
Enhancing liquidity paths is as difficult as it sounds since venture capitalists have zero control over when institutional investors or strategic acquirers will gain an appetite. But the venture industry—individually and through the NVCA—is putting some financial and political weight behind the notion of a new type of initial public offering--the hybrid IPO, or Hippo. The Hippo wouldn't present a dramatic change to the current-day IPO. Start-ups would still file S-1s with the Securities and Exchange Commission along with all the currently required paperwork. But the sale of the issues would be done in a slower, more controlled manner than the traditional IPO road show. The sale would be orchestrated by InsideVenture, a Silicon Valley-based start-up establishing a network of start-ups, venture capitalists, and institutional buyers.
InsideVenture's bid isn't the only attempt to break open the IPO market, and the NVCA is supportive of all attempts. NASDAQ has established an over-the-counter market for private equities, while start-ups SecondMarket and XChange offer services similar to InsideVenture, which appears to have the deepest concentration of life sciences players. The firm counts New Enterprise Associates, Venrock Associates, Frazier Healthcare Ventures, Versant Ventures, Clarus Ventures, Aisling Capital, and Domain Associates among its founding partners.
Mona DeFrawi, chief executive officer for InsideVenture, says the hybrid offering seeks to restore the IPO formula start-ups and venture capitalists employed in the 1990s, when investors in IPOs held long-term positions in companies. Prior to starting InsideVenture, DeFrawi served as a director of CapGen Financial. From 1991 to 2007, she led VentureQuest, helping firms raise private and public funds. She also managed investor relations for Martek Biosciences, Crop Genetics, and Meridian Medical Technologies.
DeFrawi blames the current IPO crisis at least partly on hedge funds and other short-term buyers that bought IPOs with the intent to flip the sales for an immediate gain, which she says came at the expense of the IPO company by helping to drive down its stock price. But she also finds fault with the current financial infrastructure, which isn't built to support smaller public offerings required by venture-backed start-ups. While InsideVenture isn't going to provide the research and underwriting services that traditional banks do, the company is working to bring long-term institutional buyers together with start-up companies. Under the InsideVenture structure, both buyers and sellers would become members. InsideVenture, through online tools and actual conferences, would connect the two parties, giving them the time and opportunity to establish a connection and eventually a stock sale.
DeFrawi says her group's hybrid offering will typically try to get long-term institutional buyers to acquire 40% of a new offering. InsideVenture also counts T. Rowe Price and Wasatch Advisors as founding members. Both own huge amounts of equity in publicly traded life sciences issues and could be significant buyers. The more challenging part of the pitch will be getting the company's venture capital investors to acquire another 40% of the offering, which is what DeFrawi's "recipe" for success requires. DeFrawi correctly points out that venture capitalists played a significant role in IPOs at one time. In fact, many life sciences VCs were forced to acquire shares in companies that went public from 2004 to 2008 in order to get the deals done. The remaining 20% would be sold retail, but by that time the company would have an overwhelming base of long-term investors.
InsideVenture is enlisting venture capitalists in the screening of companies that present to investors at its conferences. One of the reviewers, Dennis Purcell, senior managing partner at Aisling Capital, says he sees promise in the hybrid offerings, but "time will tell" if they're successful. He's also encouraged by the undertakings of other groups including NASDAQ's Portal Alliance and XChange, the organization backed by venture capitalist Tim Draper. "I think this is gathering some steam," he says. No life science company has staged an IPO since early 2008, when CardioNet Inc., MAKO Surgical Corp., and Bioheart Inc. managed to slip out, so the more steam, the better.
--Tom Salemi
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