A collective plea seemed to rise from this month's annual venture capital fair in Washington, where dozens of start-up entrepreneurs pitched their ideas to hundreds of potential funders: "We want your money, but we don't want to run a public company."
Chief executives' fear of the public markets, with the heightened personal scrutiny and regulatory expense they now bring, is changing how companies are built during this stage of the technology recovery. Today's start-ups are more likely to be designed from the start for a sale, not an initial public offering. Venture capitalists, who once thrived on easy and glitzy IPOs, are getting back to pinning their hopes on the more reliable business of mergers and acquisitions.
"It's the future shock from 1999 when everybody selling refrigerators wanted to be a public company CEO," says Rob McGovern, who took online job search site CareerBuilder public that year, then sold the company in 2000. McGovern recently started a new software and Internet business for the recruitment industry and is a new partner at New Enterprise Associates in Reston, the largest of the local venture capital firms. "There are a bunch of people saying, "I don't want to do that again,'" says McGovern. "Being a public company CEO has to be one of the most stressful jobs on the planet."
Art Marks, general partner at Vienna venture capital firm Valhalla Partners and chairman of Timonium-based Mid-Atlantic Venture Association, the trade group that put on the conference, says chief executives are telling him they don't ever want to run a public company. After the slew of corporate scandals from Enron to WorldCom and the resulting public company accountability requirements of the Sarbanes-Oxley Act, they worry about lawsuits and the risk to their own money and reputation. "They're signing up for a sale," Marks says. That now seems to be the predictable answer to the pivotal "What's your exit strategy?" question.
That's not all bad, Marks and other investors say. Many companies shouldn't (and couldn't) go public anyway, and a sale can still mean good return for a venture capital fund's investors, which typically include pension funds, university endowments and high-net-worth individuals.
Still, the slam-dunk success of an IPO can make such investors really rich and gave venture capital funds great glory in the late '90s. And it's not always up to the chief executive. It may be difficult to take a company public as its CEO says, kicking and screaming, that he doesn't want to go. But venture capitalists, who generally take board seats on companies in which they invest, tend to oust chief executives who don't agree with their vision of a business's future.
On the company side, going public has a completely different connotation than it did in the bubble years. Then, raising huge amounts of capital, quickly, was the only way to keep up with your competition. Even for companies without customers or profits, it was relatively simple.
"One of the reasons companies went public a few years ago was because they could," says Jonathan Silver, managing director of venture capital firm Core Capital in Washington. "Now the likelihood of a public exit is next to nil."
These days, Silver notes, the trend is for a growing number of companies to do the reverse -- go private. He's shocked at how many have, and predicts there will be many more, though he's waiting for some household-name firm to make the switch before he really gets concerned. "If Motorola decides to go private," he says, "we'd go, 'Whoa.' "
McGovern sees companies now that are funded and built with a sale in mind or, more rarely, with a "core competency" to become a public company, ready for big-time disclosures and bright-light attention.
Of course, this all means even more scrutiny and excitement will surround those companies that do manage to go public, now that some are doing IPOs again. Locally, online education company Blackboard and wireless Internet company InPhonic, each based in Washington, are preparing to go public, both after years of speculation and, in InPhonic's case, after past efforts to do so.
John Burton, former chief executive of software firm Legent and now managing partner for Updata Capital, an investment bank and venture capital firm, says he wouldn't run a public company again unless it was in an extreme situation, one he has trouble imagining. "To be a public company CEO, you would likely be paid less and have higher scrutiny," says Burton, whose company focuses on merger work. "It's a lot more expeditious and lucrative to sell to a larger company."
Burton estimates that while roughly 30 to 40 percent of a venture capital portfolio would typically go public in a "normal" non-bubble, non-crash year, he expects about 10 to 15 percent to make it now. The result, he says: It will take investors longer to get a return on their money.
McGovern says he doesn't want to sound like a whiner, but he vividly remembers the day at his neighborhood pool when a parent came up to him to complain about losing his child's college fund because CareerBuilder's stock was tanking. His ego and self-respect were at stake. "CEOs cook books because of the stress they feel by missing a quarter," says McGovern. "The world will think they're stupid."
For all that, McGovern won't quite rule out taking his new company public. At least he knows more this time, he says. And while he agrees things got too crazy for CareerBuilder, acknowledging that for a time it was a "bubble stock," McGovern worries that entrepreneurs starting companies these days don't aspire to the public markets, even if it's a pipe dream for most. Burton says most of the chief executives who say they want to do an IPO now are naive and inexperienced.
"It's bad for the economy and bad for the start-up world," McGovern says. "It's bad for the lawyers and bad for the bankers. Recycling cash is important."
Shannon Henry writes about Washington's technology culture every other Thursday. Her e-mail address is firstname.lastname@example.org.