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VCs Need to Share Blame for Low Demand for Small IPOs

We’ve don’t normally post anonymous columns, but we’re making an exception today because we think the column below will generate some interesting debate. It was written in response to Luisa Beltran’s poll last week about how difficult it is for small companies to go public. Give it a read and weigh in with your thoughts. –Ed.

Why do VCs not accept any part of the responsibility for their companies being shut out of the IPO market today? I have been involved in this business for 30 years, including many years leading IPOs at one of the “four horsemen.” I saw, firsthand, two VC behaviors which I think severely damaged the IPO market for young companies. The first is that during the boom of the 1990s, the VCs had no loyalty to the small investment banks (including the “four horsemen”) who had underwritten their portfolio company IPOs for decades.

When bulge bracket firms showed more interest in the IPO market, the VCs dumped the small underwriters. Irrelevant factors such “depth of capital” or “international capabilities” were cited. To compete, the small firms had to merge with larger banks. The second is that, during the same period, VCs pushed many portfolio companies into the IPO process before those companies were ready. The institutional investors who had been loyally buying IPOs for decades were badly burned and pulled back from the market. Now, more than a decade later, many of them still have not returned to the scale of buying that they demonstrated in the past. VCs are in the best position to know the real condition of a young company. And they should hold back from the market any company which really is not ready.

I know, I know, the VCs will retort that S-1s require a lot of disclosure and that underwriters and investors can do their own homework. But, really, the whole of this financing infrastructure — startups, VCs, underwriters, institutional investors — is built on trust. And the gross violations of this trust a decade ago have not been forgotten. So, to summarize, the VC community needs to promise to be more loyal to small underwriters and to exercise restraint in taking young companies to market. Then, and only then, will there be a restoration of the IPO market for small, promising companies. –Anonymous