It Was the Best of Times, It Was the Worst of Times (Can it be both???)

RIP Good Times???

Fred Wilson has a very upbeat blog post out today wherein he says there is an IPO boom on the way.  “The end of the IPO draught is coming,” says he.  And he is not just talking about the relatively recent unpleasantness, he is saying the decade-long draught is ending.  That’s quite a bullish statement indeed.

Contrast that with the Sequoia “Memo of Doom” that appeared less than 6 months ago and you have to wonder what’s going on.  One of these two has to be wrong, don’t they?

In fairness, Fred has the benefit of having seen more cards dealt in the hand than Sequoia did when they wrote their memo.  But all things considered, companies that cut to the bone and hunkered down have missed a real opportunity if Fred is right.  Those that at least kept stable were positioned against competitors who had potentially reduced their ability to compete through cuts.  Any companies crazy enough to double down that had an effective way to deploy the funds had a chance to move ahead even more.

The all-important question is, “Is Fred right?”

I think he is at least directionally correct.  The markets appear to be turning, and that is the essential first step.  The word I hear around the Valley is generally pretty positive.  Companies that were doing well before the latest crash are back to doing well.  There were definitely some scary months in there, but they got past it and customers are buying again.  And Fred has certainly identified some of the major factors that killed the VC IPO Golden Goose:

–  Foisting crap deals on the public.  The first Dot Com Boom and Bust cycle did a lot to disillussion the public towards VC-backed IPO’s.  As Fred points out, the public is focused on the misdeeds of others.  If nothing else, the markets have recalibrated their view on what they’ll live with for an IPO.  Things are a lot less frothy, and companies have to be more solid as Fred points out.  There are a number of $100M revenue companies still private, and those are a lot more solid than the generation of pet-food-selling-sock-puppets we saw for a time.  I think this economy is a solid treadmill test for these companies, and we’ll be able to see how solid they really are by looking at their numbers during this tough period.

–  The new generation are largely subscription-based, which is a much more solid business model provided the product is sticky. 

I do disagree with a couple of Fred’s points though.  He says:

When investors decide they want to own stocks again, they are going to look for simple businesses, products they can understand, balance sheets with cash and not much else, and growth without leverage. Guess what? That’s what the venture capital industry produces.

If that was true, we wouldn’t have had the go-round that created so much trouble with the dot com boom.  Like any investment category, VC has both growth and momentum investors.  If they were all growth investors, as Fred claims, there’d be no problem.  Unfortunately, the momentum guys are very prevalent, and even try to game the growth investments.  Have you talked to a firm lately that emphasizes how they want to be the last money in?  That’s a momentum investor, and they’re the majority of firms.

He also says not to worry about SOX, it’s cheaper, it’s the devil we know, yada, yada.  Putting the yada, yada, aside, it still impacts the generation of cash considerably. 

So are we going to completely blow the lid off with another gigantic IPO boom that will rescue VC’s from Bad VC Math?  I doubt it’ll be “unprecedented” in scope, but I think times are definitely looking at lot better.   We are going to see some IPO’s because there are a number of private companies growing quite large.  Provided they are successful post-IPO, the trend will continue.