NEW YORK-High-technology companies have benefited in recent years from the robust market for initial public stock offerings, which in turn encourages venture capital investments. But even the most vigorous IPO and venture capital markets have their limits, so competition is keen among companies seeking these kinds of financing.
“The new issue (stock) market drives venture capital because, by driving company valuation, it gives venture capitalists an opportunity to exit early,” said Harry Friedman, a professor at New York University’s Leonard N. Stern School of Business.
“In past decades, there were about 500 IPOs a year. Today, the typical IPO market won’t do more than 1,000 to 1,200 a year,” said Friedman, who teaches courses in venture capital finance and financing for high-technology companies. “Venture capital typically will only raise money for about 500 companies a year.”
Finding and exploiting the appropriate window of opportunity in going public is key to the success of initial public offerings, said Ellen Corenswet, a partner at the law firm of Brobeck, Phleger & Harrison L.L.P., New York. “In the past, these windows would open and shut quickly,” she said. “We’ve gotten spoiled because the market has been good and ready for a long time.”
The law firm has helped arrange venture capital and IPO financing for a variety of high-technology companies. At present, for example, it is working on possible venture capital financing for an Israeli company involved in spread spectrum technology, said Corenswet, citing client confidentiality and legal restrictions in declining to elaborate. It also helped arrange a partnering agreement involving technology licensing and financing between Philips Electronics North America Corp., Teaneck, N.J., and Cellular Vision, New York, a start-up wireless cable company.
Even if the IPO market is saturated, Friedman said venture-capitalized companies still have other options to reach new development stages, among them: leveraged buyouts, mergers, going public through a non-operating shell company and going semi-public through a private placement hybrid known as a 504 offering.
Corenswet and Friedman spoke recently at a “Venture Capital and Business Growth” conference and exposition, sponsored by the Strategic Research Institute.
While the IPO market helps determine valuation, an accurate assessment of company valuation levels is necessary even before a company seeks venture capital financing. One of the most critical issues confronting the management of a company is the development of an accurate assessment, “of how much money you’ll need to get to the next valuation level,” Corenswet said.
Often, venture capitalists want the right to require the timing when a company in which they invest goes public, as well as the right to set performance goals, Corenswet said.
But, she added, “I don’t want to overstate control. With good venture capitalists, you get more control than they do [unless it’s] a situation where the venture capitalists are worried about a company’s management.”
Weak management and unrealistic expectations on company valuation are key reasons why companies get turned down for venture capital investment, Corenswet said. Other reasons for rejection include: “mistaking a product for a company; requiring too little or too much money; ignoring market size, trends or competitors; (providing) incomplete information, (and) failing to establish that a profitable market niche exists for the planned product or service.”
