One Exit Gone

It's not that the IPO market is gone forever, but it is closed for business currently. This has caused problems for venture-backed firms needing liquidity, but also makes it harder for small business owners looking to sell. With the IPO market closed, sale prices will be lower. If you can wait for better times you will garner a better selling price, but it will be a longish wait.

If your business plan lists an IPO as near term exit strategy, you can forget it. Oh, the market will come back, just not any time soon. At least according to the folks polled by Inc. magazine. Of the Venture Capitalists polled, 79 percent said IPO activity won't pick up again until 2010!

According to C/Net News, not one IPO was launched during the second quarter 2008 in the US. As they noted in a piece dated July 1,

"The broader pullback in the economy is affecting corporate spending and is clearly impacting the M&A market," Jessica Canning, global research director for Dow Jones VentureSource, said in a statement. "Corporations might be out looking for venture-backed companies to acquire, but many are either doing so quietly or choosing to hold off on entering into negotiations."

Since March, for example, 10 companies have yanked their IPO registrations. Currently, 22 companies still are registered to launch an IPO, but are waiting for the markets to improve before going out, Canning said.

All this means you may want to sit tight until the market rebounds, but you may be waiting a few more years (not just months) for that to happen.

But It's My Baby!

Making money is not always the top focus of an entrepreneur. As described by Ann Meyer in the Chicago Tribune today, founders often fail to make the transition from startup with full control to a successful growing entity.

According to Harvard research cited by Meyer, only one in four founders are still holding the reins when a company goes public. This indicates that successful startups manage to overcome the founders grip most of the time. This is not surprising given the multiple levels of capital needed to get to the public realm. Usually a startup must go through several rounds of outside financing to build the prototype, establish production, setup template installments, and the many additional fazes of launching a business. These successful launches, the ones that go public, are greatly outweighed by companies that involve private takeouts (including acquistion) and the failed companies. The failed companies you don't hear about are the ones that suffer from founder fatigue and often implode from personnel departures.

An early offset to a strong founder is having a solid financial person in place to display and bolster the cash flow side of the business, as well as to foster good relationships with financial market partners. Your banker and accountant, along with outside investors can provide solid backing and support and help lead a recalcitrant founder down the correct financing path.

Remember, 10% of millions is a lot better than 100% of zero.

Equity Might Be Out There For You

In my Angel discussion last week, I discussed the slow-down in angel investing in 2007, presaging if not anticipating the slow-down in the financial markets this year. Apparently, while following more cautious principles than in the internet hay-days, the professional investing markets are looking forward, and making investments in selected sectors. As discussed in James Flanigan's Entrepreneurial Edge article today, equity capital is available for the right story.

One sector discussed is mobile communication devices and related software. This is clearly a growing industry in the US and something that will need continued investment. It promises solid returns for early investors, and the professional investment firms, including private equity and venture capitalists are focusing here. Likewise, "green" technologies are getting favorable attention.

So it does seem that it's harder to raise debt these days, ergo , if you have a candidate do seek out the professionals (as long as you have a technology or "green" startup, that is)!

Angels Spread Risk as well as Wings

Angel investors have become more conservative over the past couple of years, as reflected by the survey released recently by the Center for Venture Research at the University of New Hampshire's Whittemore School of Business and Economics. The survey reveals several concerns reflected in the data based on 2007 numbers. Potential borrowers should be aware of these trends.

The Center notes several figures of concern.

• Total investments made reached $26.0 billion, a mere 1.8% increase over 2006.
• Entrepreneurial firms receiving funding grew 12%, and the number of active investors increased 10.3%, indicating a smaller average deal size - probably an indication that investors were seeking to spread their risk further.
• Software, Healthcare, and Biotech netted 58% of total dollars invested.
• The Yield Rate, that is the number of proposals that were funded by angels, declined from 23% in 2005 to 14% in 2007, further reflecting a tightening market.

If you are considering approaching the angel market for funding, keep these trends in mind and have a full read of this study for more information.