What a Difference Five Years Makes

During 2007, we witnessed 86 VC-backed IPOs bring in $10.3 billion in fresh capital. Unfortunately, 2008 did not produce the same pay day. With only 6 IPOs yielding $470 million, many feared the party was over. Fear not, 2009 brought a sliver of hope as the number of IPOs doubled to 12, bringing in $1.6 billion. 2010 proved to be a strong year. We were blessed with 75 IPOs, bringing in $7.6 billion. Of course, 2011 would be more of the same, right? Wrong.

The Year of Bloated IPOs

In 2011, we had approximately half the number of IPOS as 2007, yet the amount of capital raised was roughly the same. At first glance, we might think this is a good thing. Actually, this is the worst thing that could have happened. Jumbo IPOs were caused by underwriters propping up prices to unsustainable levels, knowing that the market was hungry for new shares. The average IPO jumped 30% on opening day and stumbled back below opening price. Slumping stock prices acted as a distraction. Management should have been focused on growing the company, not the stock price.

Below is a chart of a few high flying stocks that closed the year below their opening price: Demand Media, Pandora, LinkedIn, Groupon, Zynga and Angie’s List.

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Lean and Mean, Miss Diane Greene

Let’s look back at 2007. VMW was the hottest IPO. They went public on August 14, with prior year revenues of $704 million, net income of $87 million and $176 million in cash. The stock opened at $52, rose 90% on the first day and peaked at $107 on November 9. At the end of 2007, the stock closed at $85, up 63% from the opening price. Over the past five years, the share price ebbed and flowed with the markets, but has now settled in the mid $80s. VMW continues to be a healthy company, focused on increasing market share, not market cap.

Pipeline is About to Burst

Currently, there are over 205 companies which have filed to go public. To put this in context, 299 companies filed to go public in all of 2007 and 259 companies filed in 2011. Over the past five years, with the exception of 2008, the percentage of companies that identify as technology companies held steady at approximately 15%. In 2012, we could see well over 50 technology IPOs. Let’s hope they are appropriately priced.

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IPOs are Good for America

Historically, 85% of job growth occurs after a healthy IPO. It is critical that we get IPOs priced for sustainability (read: job growth), not quick profit. We want CEOs focused on increasing staff, not bending over backwards to please shareholders clamoring for their “profit.” If CEOs are worried about expenses, they’re less likely to invest in growth. In this scenario, nobody wins.