Silicon Insider: The Return of the IPO?
Feb. 6, 2002 -- What was the most important piece of business news last week? No, it wasn't Enron.
In fact, as with many small but portentous events, you may not have noticed it at all. Certainly most of the media missed it. What was this earth-shaking event? The initial public offering of stock from a small company you've never heard of named Synaptics. It makes personal computer touchpads.
So? You're probably saying, "What's the big deal about that?" The last five years have seen thousands of IPOs by small tech companies nobody's ever heard of — hundreds of them in Silicon Valley alone.
Yeah, but not lately — and especially not since Sept. 11. And that's the point.
Ever since the dot-com bubble burst, it's been well-nigh impossible to take a high technology company public.
The markets were not only burned badly by the Pets.coms and Boo.coms of the world, but as the economy slumped they also began to doubt the near-term viability of any small technology company. As a result, the traditional rite of passage by which a young company passes from private to public ownership has been frozen.
This might seem like no big loss. After all, "going public" was widely abused by fast-moving start-ups as a way for the founders to cash out millions by dumping their hollow, doomed companies on small shareholders like pensioners, CNBC watchers and other poor suckers. So good riddance to that con job called Going Public Day.
Tarred with the Bubble’s Brush
But there are a couple problems with such a sweeping indictment. First of all, the events of the dot-com bubble were aberrations in a long and noble history of initial stock offerings. It tars with the same brush the multitudes of real, well-managed and enduring companies (you know: General Electric, IBM, Intel, Microsoft, Hewlett-Packard) that went public in order to raise the hunk of capital they needed to grow to the next stage in their development.
Very few companies can grow to a billion dollars in sales or more without a massive injection of cash — for new product development, marketing, factories. They just can't do it on profits alone. Take away the IPO (and secondary offerings in later years) and most of those great companies — and their hundreds of thousands of jobs — would not exist.
The second problem with a stalled IPO market is that it also paralyzes the venture capital industry. For the last two years, VCs have been sitting on mountains of cash, unwilling to invest it. Some have actually given hundreds of millions back to investors.
Why? Because IPO day is the standard conclusion of a VC's investment in a start-up company. Most of those shares being put up for public sale belong to the venture firms that invested in the company all along its infancy, from seed capital to the final mezzanine round.
Without that end-point — and VCs need a finish line because the funds they manage have a specific duration — venture capitalists are wary of investing in anything. Every young company on hold waiting for the stock market to become hospitable to an IPO represents millions of dollars not invested in a dozen brand new companies.
Frugality that Cuts to the Bone
The result has been devastating in places like Silicon Valley. In the last year I have seen at least a dozen terrific new enterprises, some with potentially milestone products, either die or go into hibernation because they could not obtain the next round of venture financing. Two years ago, that kind of frugality would have been a blessing, but now it is cutting into muscle and bone.
These aren't frou-frou dot-coms that are dying, but real companies, with real products, run by veteran entrepreneurs. These are the firms that should be leading us into the next economic boom.
That's why the Synaptics IPO is so important. It isn't the dream IPO, like Netscape was, that turns the market on its head and sets off a land rush. Rather, it is an old-fashioned tech company — 16 years old, $100 million in sales, chaired by Valley legend Dr. Federico Faggin, the man who built the first microprocessor. But it will do.
Nor was the Synaptics IPO particularly spectacular, not compared to the 20-times first day stock price run-ups we saw a couple years ago. The company sold 5 million shares, which opened at $11 and, in a market that fell 2.5 percent for the day, managed to close up 20 percent ($13.11 per share). But once again, it will do. In fact, a little more sobriety this time around would be welcome.
Of course, one lark doesn't make a spring. Still, combined with other news, the Synaptics IPO seems like a bellwether pointing towards good times ahead. Certainly the venture capital industry, usually the first to know, has begun to detect signs of a turnaround. It recently released a report saying that VC investments increased in the fourth quarter of last year — up 2 percent to $7.1 billion — the first such jump in two years.
That news couldn't be more welcome. I'll wager that among those new investments are the companies that will lead the world's economy in 2005. It is also good news for Silicon Valley: fully one-third of those investments (up 14 percent to $2.5 billion) were here, meaning the Valley will remain the heartland of the digital world for at least another decade.
Michael S. Malone, once called “the Boswell of Silicon Valley,” is editor-at-large of Forbes ASAP magazine. His work as the nation’s first daily high-tech reporter at the San Jose Mercury-News sparked the writing of his critically acclaimed The Big Score: The Billion Dollar Story of Silicon Valley, which went on to become a public TV series. He has written several other highly praised business books and a novel about Silicon Valley, where he was raised. For more, go to Forbes.com. And you can talk back to Silicon Insider via e-mail.