Silver Springs Networks

The tech IPO drought is only going to get worse

March 19, 2013: 6:52 AM ET

Silicon Valley has fallen out of love with the initial public offering.

By Kevin Kelleher, contributor

Cracked pans of Sossusvlei below golden sunset, Sossusvlei, Namibia

FORTUNE – Last week, Silver Spring Networks went public on the New York Stock Exchange, an event notable not merely for being the stock market debut of a clean-tech star, but also because it was only the second technology IPO of the year.

Silver Spring (SSNI) raised $81 million in an offering priced at $17 a share. Its stock is trading 25% higher. Last month, Xoom (XOOM), an online money-transfer service, raised $101 million; its stock is 41% above its $16 offering price. And Professional Diversity Network (IPDN), an online job-networking site, raised $21 million. It's currently 17% below its $8 offering price. Other IPOs so far this year -- like Health Insurance Innovations (HIIQ) -- mention the cloud or online platforms in their business models but are more focused on other industries like health insurance.

In other words: We're nearly a quarter of the way through 2013, and three companies have raised $203 million.

This is not what investment banks were hoping for in the wake of the long-awaited Facebook (FB) IPO, which was once expected to reignite a recession-battered IPO market the way Google's (GOOG) 2004 offering wiped away all the bad memories of the dot-com crash.

Ever since Apple (AAPL) went public in December 1980, technology startups looked forward to the chance to go public. The dot-com mania cooled investor interest for a few years, but names like LinkedIn (LNKD), OpenTable (OPEN), and Zynga (ZNGA) received warm welcomes. But ever since the glitch-plagued Facebook IPO last May, all but a handful of tech companies have braved the IPO pipeline.

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In 2011, 44 tech companies went public on U.S. exchanges, raising $9 billion, or 27% of the total proceeds raised in all industries, according to Renaissance Capital. If you factor out Facebook's $16 billion IPO, then in 2012 only 37 tech companies went public, raising $4.4 billion, or 17% of the total. This year's pace so far is dramatically slower.

More tech companies are in the pipeline, including Model N, a life-sciences software company that hopes to raise as much as $94 million; and Marin Software, a cloud-based ad-management company, which is looking to sell as much as $91 million in shares.

But such modest deals are the exception to companies that aspire not to deal with the onerous duties of being a publicly traded company. (They seem to prefer to be acquired by a bigger company or, simply, to stay public as long as possible.) Groupon (GRPN) serves as a cautionary tale to startups that follow the IPO route. Rebuffing Google's $6 billion offer in 2010, Groupon went public and is currently valued at just $3.5 billion.

In an illustration of how dreadful the idea of an IPO market has become to tech-startup founders, a panel of VCs, investment bankers, and attorneys convened at the f.ounders conference, which has been described as a Davos for geeks. The panel's title: "The road to IPO." Its bottom-line message: "Don't go public." (Keep in mind that this panel was hosted at Nasdaq's MarketSite in Times Square.)

The troubled Facebook IPO is only one reason for the new aversion to tech IPOs, and one of the lesser ones. Nasdaq's trading glitches last May only underscored bigger factors that put tech founders off: the increased scrutiny of investors and reporters, the quarterly earnings circus, the costs and complexity of Sarbanes-Oxley, the exposure to short-selling hedge funds, the specter of activist investors. Mark Zuckerberg put off a Facebook IPO as long as he could. Today, he can look back and wish the company were still privately held.

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Many of the new crop of tech startups are much smaller operations than the biotech, manufacturing, or retail companies that fill up today's IPO queue. Those devoted to web sites or mobile apps are often no bigger than a couple dozen employees, or even fewer, who have found success.

In many cases, an acqui-hire by a giant like Facebook or Google offers a simpler exit strategy -- even if it means being swallowed into an entirely different corporate culture. For bigger web startups, secondary stock markets provide access to institutional funds and wealthy investors without the regulatory burdens and scrutiny of public markets. Small surprise that Nasdaq is working with SharesPost to create a market for private-company investments.

All of those factors have driven IPOs out of fashion in the tech industry. It's getting to the point where a tech IPO has lost its cachet -- even signaling a potential desperation for quick capital. In Silicon Valley, the IPO just isn't as cool as an acqui-hire. It's like watching everyone make a Harlem Shake video, and then dancing the Macarena.

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