The Business of Venture Capital, 3rd Edition

35Initial Public Offering

The initial public offering (IPO), or “going public,” holds a special cachet in the world of VC-backed companies. Often marking the coming of age of companies, entrepreneurs see it as the epitome of success. But the regulatory and market complexities are significant and have impacted the IPO dynamics significantly.

In the 1990s, an IPO was within reach for companies with annual revenues of $30–50 million that showed a profitable quarter and had a good board and management team. After the dot-com crash of the 1990s, it was the larger, more mature companies with revenues of $150+ million that were seen as suitable candidates for public offering. This, combined with regulatory challenges, had the effect of stretching out IPO timelines for companies.

Ninety percent of firms surveyed separately indicate pursuing dual strategies in which they consider both an IPO filing and a trade sale for their portfolios.¹ Dual tracks offer a better negotiation leverage. “Dual track for an exit? Now that is a problem we'd love to have,” says Bryce Roberts of O'Relly AlphaTech Ventures (OATV), an early-stage venture fund.

If the company is ready and the markets are favorable, the public offering is certainly a better option because most acquisitions don't generate the killer returns that public offerings do. Because IPO-ready companies can be affected by market downturns and regulations, the volume of investment returns for investors may be driven more by acquisitions ...