October 14, 2013
As we approach the end of the year, it’s worth noting the impressive showing IPOs have managed in 2013. PitchBookdata show that there have been 60 VC-backed IPOs through the first three quarters of 2013, up from 50 in all of 2012 and 45 in 2011; and in 2Q and 3Q 2013, public offerings comprised 17.6% and 16.7% of all exits, respectively. The last time IPOs made up such a large proportion of VC exits, Lehman Brothers was still nearly a year away from bankruptcy and the Colorado Rockies were in the World Series. And we have to go way back to the tech bubble to find a year (2000) with more overall IPOs than 2013.
As an exit strategy for venture capital firms, the IPO has its pros and cons, but higher stock market valuations this year and investors’ desire to hold on to shares longer as their portfolio company continues on its growth trajectory as a publicly traded company are two major reasons for growth in the number of public offerings this year. However, even as IPOs grow as a share of all VC exits, the median percentage growth in valuation from previous round to IPO has fallen below the overall trend, which is more influenced by acquisitions.
For companies that completed their IPO in 2012 and 2013, the median percentage change in valuation from the last VC round to exit was 84.3% and 49.5%, respectively. These are both less than the 98% and 71% that all VC exits (including IPOs) posted in 2012 and 2013. This contrasts with 2010, when companies that completed a public offering saw their valuation increase 56.9% over their previous VC round versus 41% for all venture capital exits.
Myriad factors may contribute to this phenomenon. First, VC-backed companies that IPO in general have larger final rounds because late-stage investors are willing to pay a slightly higher price to get in on what they see as a company on a successful exit trajectory—think Twitter, which just filed with the SEC and raised $400 million in its 2011 Series G round.
Second, investors, while obviously hoping for as big a return as possible, may be more content to let their share values grow on the public market as they rush to take companies public now while the IPO window remains open. Finally, more competition among corporate acquirers for VC-backed companies may drive up valuations for these companies, leading to a higher overall percentage change in valuation from final round to exit.
It’s also worth noting that the time between the final venture financing and exit for IPOs is roughly on par with all VC exits in 2013, and was actually about four months longer in 2012.
Regardless of exit strategy, valuations are off the charts right now, and it will be interesting to see how much longer VC firms will be able to enjoy such great opportunities for returns.