How Will Tomorrow's Tech Company Builders Raise Capital?
The high tech ecosystem is awash with company starters, those entrepreneurs and venture capitalists who know how to start and flip companies (sorry, I meant to say "develop innovative technology startups and create early liquidity events"). But I think there is something special about what I call the company builders, who start and build companies over decades. Bill Gates, Larry Ellison, Steve Jobs (his sabbatical notwithstanding), Scott Cook, Scott McNealy and Michael Dell bring something special and important to our industry. The company builders found and grow iconic companies, each with a unique character, vision and personality. They are, through their personal forcefulness and perseverance, able to build enduring companies that are truly different and pioneering. Their companies innovate their own way, create wealth for millions and instigate major changes in our economy and society. They build companies with soul, the ones we all love to talk about, the ones that often inspire, through love or hate, the next generation to play in our game.
The concern I want to discuss today is that the machine that provided the capital needed by such company builders to reach critical mass is broken. Unless we repair it or replace it, a vital force that has driven economic development may be lost.
The capital raising model which has been finely tuned over the last few decades is simple: angel investors, then venture capitalists, then IPO. The devil is surely in the details, and there are many variations on the theme, but the key element that has broken is the IPO market.
The IPO market is pretty much closed to tech startups. The hangover from the dot-com bubble has made investors and investment bankers highly skeptical and risk averse regarding tech IPOs. The IPO bar now requires demonstrated revenue, cash flow and profit beyond the reach of most early stage tech companies and beyond the patience horizon of most venture capitalists. This is exacerbated by the public company penalty, that is, the added cost of operating a public company versus a private company, which has increased dramatically and disproportionately for smaller, growing companies than for large ones. Sarbanes-Oxley is but one contributor to this penalty. Going public has become a prohibitively expensive ambition for most startups.
The rise of private equity funding seems unlikely to replace the public capital markets for company builders. These are at their core driven by financial considerations with an emphasis on "professional management." Visionary company founders and builders with multi-decade time horizons and private equity financiers do not make good bedfellows.
Given the limited patience of VCs and the closed nature of the IPO market, it appears that today's tech entrepreneur needs to plan on being acquired as an exit strategy. Company builders appear to be excluded from the game. We cannot afford this loss.
Copyright © 2006 Philip Bookman
Technorati: software finance software investing software venture capital software entrepreneurs company building
The concern I want to discuss today is that the machine that provided the capital needed by such company builders to reach critical mass is broken. Unless we repair it or replace it, a vital force that has driven economic development may be lost.
The capital raising model which has been finely tuned over the last few decades is simple: angel investors, then venture capitalists, then IPO. The devil is surely in the details, and there are many variations on the theme, but the key element that has broken is the IPO market.
The IPO market is pretty much closed to tech startups. The hangover from the dot-com bubble has made investors and investment bankers highly skeptical and risk averse regarding tech IPOs. The IPO bar now requires demonstrated revenue, cash flow and profit beyond the reach of most early stage tech companies and beyond the patience horizon of most venture capitalists. This is exacerbated by the public company penalty, that is, the added cost of operating a public company versus a private company, which has increased dramatically and disproportionately for smaller, growing companies than for large ones. Sarbanes-Oxley is but one contributor to this penalty. Going public has become a prohibitively expensive ambition for most startups.
The rise of private equity funding seems unlikely to replace the public capital markets for company builders. These are at their core driven by financial considerations with an emphasis on "professional management." Visionary company founders and builders with multi-decade time horizons and private equity financiers do not make good bedfellows.
Given the limited patience of VCs and the closed nature of the IPO market, it appears that today's tech entrepreneur needs to plan on being acquired as an exit strategy. Company builders appear to be excluded from the game. We cannot afford this loss.
Copyright © 2006 Philip Bookman
Technorati: software finance software investing software venture capital software entrepreneurs company building
Labels: software strategy
posted by Phil Bookman at 10:40 AM
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