OpenTable – VCs Waste Another IPO

VCs lamented the dead IPO market ’round the clock at the AlwaysOn Venture Summit two weeks ago, where the theme of conference was the search for liquidity. Yours truly participated on one of three panels dedicated to raising the four horsemen from the dead. The NVCA has published a position paper on the national IPO crisis, recognizing the need for a viable underwriting ecosystem — and even calling for government intervention. So we are to understand that VCs, in their infinite wisdom, altruism and patriotism recognize that a sound IPO market is critical for the economy. So critical, in fact, that they are ready to champion government involvement to fix the machine.

I completely agree that our IPO market needs fixing. But the venture community needs to get out of its Aeron chair and pitch in before calling the “Obama Phone.”

Benchmark, Integral and Impact threw another shovel of dirt on the IPO market with OpenTable, when they paid 70% of the deal fees to Merrill Lynch – a firm that is too big to care about small cap IPO’s. Does anyone with half a brain think that the OpenTable deal fees will have any effect on Merrill’s allocation of resources?  Big banks like Merrill, Goldman, JP Morgan, Morgan Stanley can not afford to focus on the small-cap IPO market. You don’t need a calculator to do this math!

Investment banks should use IPO deal fees to cover the long term costs of research analysts, market makers, institutional sales, non-deal roadshows, investor conferences. All of these services are required to have a sustainable IPO market.

Benchmark Capital, Integral Capital Partners and Impact Venture Partners followed the VC herd that has prioritized brand over service since the Internet bubble. “Why pay IPO fees to a small growth focused firm like Thomas Weisel when I can get a cool helicopter ride to Merrill’s palatial headquarters?” The venture herd has turned its back on the firms that have committed 100% of their talent and capital to the real IPO market – firms like TWP, JMP, Cowen, Needham, and Piper Jaffrey. That is what has killed the IPO market.

When the IPO market worked, prospectus covers were dominated by firms that were totally dedicated to small cap offerings. Firms that provided all the required services because that was their #1 line-of-business. It was common to see three underwriters splitting fees 40%-30%-30% because each firm was going to dedicate the needed resources to support the new public company for years!

Ok, ok – I get why VC’s turned to the bulge bracket in the bubble. The four horsemen got sloppy and VCs needed bulge bracket financial advisors to manage the personal fortunes they were pulling out of IPOs. Plus – during the bubble – IPOs were kinda automatic thanks to Daytraders et al. But that was a moment in time that ended in 2000. The real IPO economics were back by 2001 and, while it will come as a shock to the venture community, you can’t maintain a full-service, growth-focused investment bank without revenues.

Seventy percent of the deal fees to Merrill – Really???? Another 10% to Allen & Company for no research or trading – Really????? You want to call Obama to fix the IPO market – REALLY???????

Want a solid IPO market – try paying for it.

Chris is the founder of Bulger Capital, before which he spent three years at Needham & Co. as a senior partner and head of technology banking. He also is a Robbie Stephens vet, having run its Boston office and its global technology banking group.

Read Chris’ earlier posts here.