Olson’s Observations

Matt McCall wrote a particularly interesting piece today regarding a handful of the latest post IPO valuations on venture backed companies. The verdict: public markets are not so bubbly. Here are the deals Matt mentions:

Vonage:
$ in — $396m
Post VC IPO Value — around $400m

Restore Medical:
$ in — $40m
Post VC IPO Value — $53m

Novacea
$ in — $122m
Post VC IPO Value — $93m

Pension Worldwide
$ in — $35m
Post VC IPO Value — $73m

I had talked a bit about the Vonage IPO being a bust on the VentureWeek podcast a while back but these numbers prove it. As Matt points out, IPOs are supposed to be the big winners for VCs and, if you look at the above, it appears that IPOs are only returning 1 - 3x where VCs are really looking for 10x. That is dismal. Couple that with record amounts of money being raised and we’re in for some hurt down the road.

VCs are continuing to raise larger and larger sums of money which means more and more companies will get funded and soon, if it isn’t happening already, it will become very hard for VCs to find quality investments. This will lead to two things:

1. Money will be put to work in companies that do not deserve it so the management fees continue to flow in while the alpha of the funds plummet.
2. Money that is committed to VCs does not get put to work at all causing LPs to have an upset asset allocation in their non-marketable alternative asset portfolios.

This is not good for the VCs, LPs (investors) or entrepreneurs (Matt covers the entrepreneurs end in his post). I feel that sometimes we, in the venture world, tend to get caught up in what we are doing and we forget the public markets completely. Having come from a public markets background I always try to remember that, in order for a company to be a huge success (by going public), the public market needs to be ready to embrace it with open arms. For that embrace to happen the company either needs to be doing quite well or public equity investors need to be drinking the kool-aid (at least a little bit).

After the last bubble investors have hopefully learned to be a bit more skeptical and to look for “legitimate” companies in the IPO mix (I think they have learned their lessons fairly well considering the IPO numbers above. Vonage I believe still has no clear path to profitability so it is good to see investors valuing it as such.). This is good in the long run as good companies will be justly rewarded and poor ones will not but it means that all of us in the venture community may need to plan for a longer ride than was initially planned for. As everyone knows, the VC business needs spurts of irrationality and always will but these spurts need to be coupled with irrational spurts in the public markets in order for things to work so let’s give the bull some time to make it back to the top.

In closing I will refer you to a post I wrote back in October ‘05 entitled, “The Web 2.0 Debate: Bubble 2.0?” A lot of the thoughts in that post are still true almost a year later.