Why small technology companies have stopped going IPO

In the first half of 2014, 30 technology companies entered the US IPO. They were such as: Paycom Software, which produces software by the SaaS model (software as a service - “software as a service”), Castlight Health, which aims to provide access to software “in the cloud” and the UK company King Digital Entertainment , which produces interactive games. Half of the companies from this thirty in the year make about 60 transactions. This is their best result since 2007.

However, in spite of record levels, the number of deals made after companies ’IPOs is only half of the corresponding average annual figure from 1980 to 2000 (116 deals). And this is taking into account the actual growth of GDP in more than 2 times since 1980. So why other companies do not aspire to become open?
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Despite the existence of a legislative act of 2012 (Jumpstart Our Business Startups - literally Quick Start Your Business Startup), designed to clarify some difficult moments for companies that are in the “Emerging Growth Companies” companies, it is widely believed that after an IPO Companies are making excessive demands. According to the document, the company is at the “stage of recovery” only if it entered an IPO less than 5 years ago and its annual income does not exceed one million dollars.

The refusal of small companies to publicly place their shares on the stock exchange began in 2002, before the adoption of the Sarbanes-Oxley law (the law tightens the requirements for financial reporting and the process of preparing it). There really is some truth in the existence of excessive requirements, but the matter is not only in the legislative part.

In 2013, only 43 technology companies entered the IPO, while venture capitalists sold 376 companies , mostly to such giants as CiscoSystems, Google, Microsoft, and Oracle. In other words, the most successful young companies will sell their business rather than become open to private investors. This trend has been observed since 2000. The average annual profit of technical companies that came out for an IPO over the past year amounted to 106 million dollars. In 1996, due to inflation, this figure was only at the level of 25 million. From year to year, venture capitalists prepare companies for sale, instead of putting their shares up for public auction.

The article “ Why did companies stop making IPOs?” (“ Where Have All the IPOs Gone? ”), Which I wrote with Xiaohui Gao and Zhongyan Zhu, discusses the need for the company's rapid growth in modern realities. This is especially true of the technical sector. If you give a small technology company with a great new idea to grow by itself, then this process will take a very long time. Instead, companies are increasingly finding it more profitable to sell the technology of a larger company, which can immediately integrate it into existing products. Large players have whole armies of engineers and marketers who can start working on a new product without additional delays in the form of hiring new employees and developing the brand.

However, not all companies seek to sell their business. For example, Facebook and Twitter went IPO and remained independent companies, although this only happened after they grew up. Some firms, regardless of their status, need to remain independent in order to survive. The rest are valued more in the larger players. In the technology industry, the most successful step for young companies with technology is the sale of their business.

Most of these sales are aimed at large organizations, rather than at private investment funds. In the latter case, investment funds stand at the helm of the company, but it continues to remain independent.

This year can be considered the richest in the number of companies that have entered IPOs since 2000, when the technology bubble burst. Among the majority of such companies is a record number of organizations related to biotechnology.

Previous records were set in 1996 and 2000. However, even without the corresponding deals in the field of biotechnology, the IPO market looks impressive. Similar could be observed in the period from 2004 to 2007. More information on the years can be obtained on this page .

One word, regardless of the rise in prices on the stock exchange and the adoption by the Congress of the Jumpstart Our Business Startups (JOBS) 2.0, I do not expect a large number of young companies to enter the IPO, as it was in the 80s and 90s. For most young technology companies, it is not so important to “get out”, whether the company will remain independent or be absorbed by larger players who can quickly benefit from economies of scale and savings from combining. For the same reason, WhatsApp has sold its Facebook business for $ 19 billion, instead of going public.

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