Heather Gates

by & filed under Capital Formation & Regulation, NVCA Blog.

Note from NVCA: We always encourage our members and industry partners to share their perspectives on industry issues. Heather Gates of Deloitte shares her views on the current IPO environment for venture-backed companies. NVCA remains engaged on capital market reforms to support small cap companies. We recently released a report with the U.S. Chamber of Commerce on policy reforms to encourage more public companies.


Recently, I had the pleasure of participating in the Stanford/NVCA Venture Capital Symposium along with Scott Kupor, Greg Rodgers, Jeff Thomas, Nizar Tahurni and Justin Field. Our panel, The Death of the IPO, focused on the trends in the volume of IPOs and the challenges and opportunities facing aspiring publicly traded companies.

Interestingly, within just the past week or so, we’ve seen a recent uptick in enterprise tech IPOs and companies in the media and fintech space going public or announcing plans.

In fact, the pervasive sentiment during the discussion was that the IPO market has the potential to be robust in 2018 and is still a viable and often preferable exit strategy. In fact, “the IPO markets rebounded in 2017, with close to $10 billion raised across 58 completed listings, reflecting significant increases of 236% and 41% respectively over the prior year.” (Source: PitchBook-NVCA Venture Monitor; page 27).

Timing, ultimately, becomes a key factor in how the market will shape up as we begin the second quarter of the year.

Over the past decade, many factors have impacted when and how a company will pursue a public offering:

  • Increased Regulation. The SEC has implemented significant regulatory controls over publicly held companies, which have increased the cost of compliance. However, the returns still outpace any other asset class of M&A deals. Companies that properly plan and can absorb the financial costs will be better positioned in the public market. Increased liquidity is a huge benefit that counteracts compliance costs, as liquidity helps companies attract and retain employees as well as make strategic ongoing acquisitions.
  • Secondary Stock Offerings. Private companies are doing secondary stock offerings to allow for liquidity for their employees. Ten years ago, you would rarely see a secondary offering, letting employees and founders cash out. Now it is commonplace and alleviates some of the pressure of creating liquidity through an IPO.
  • More Private Equity Funding. PE money is undoubtedly helping companies stay private longer. However, more capital does not necessarily replace the long-term benefits of going public. It just means the public offering may be bigger down the line.
  • Rise of Acquisitions. Goldman Sachs forecasts that cash M&A spending will climb by 6% to $355 billion in 2018. This means that companies can choose to grow through acquisition, versus IPO, and existing public companies may see a boon to their stock. Public company currency often alleviates some of the challenges around valuing two private entities at acquisition. At the same time, the distraction of mega deals creates opportunities for emerging companies to continue to innovate. Prolonged timeframes for integration and corporate cultural alignment may stall innovation in larger companies.

Once a company decides to go public, the question remains whether they will be successful.

  • Companies need to have clear growth goals and the ability to predict their financial results with a high degree of accuracy.
  • Act like a public company – Assemble great teams, hire additional professional finance help if needed, and compile your financial statements as if you already went public.
  • Make sure you have systems in place that will scale as your company grows to success.

Ultimately, the market, timing and interested investors will determine whether the IPO fulfills expectations. As we see more IPOs succeed, we can expect more companies to approach the public market. The first half of 2018 will likely close with some highly anticipated IPOs. Thus, it’s WAY too early to call for the IPO’s death bed. In fact, we are just getting started.