Investment Banking Advisor Points to the Exit for Venture-Backed Startups

Founders of venture-backed startups should be building their business to go public through an IPO, but it is far more likely they will get acquired instead, according to former investment banker Steve Fletcher, who is now a managing director in the San Francisco office of GCA Savvian Advisors.

Fletcher, who was a keynote speaker this morning at the Red Herring North America 2010 conference in San Diego, says financial markets have fundamentally shifted away from small cap IPOs. Last year, the median IPO raised $107 million, and as Fletcher puts it, “The days of the $30 million IPO are largely gone.”

The mix of venture-backed IPOs also has changed, says Fletcher. The number of tech IPOs, which was by far the biggest sector not long ago, shrank to 25 percent of the total in 2009, Fletcher says. Healthcare IPOs accounted for 37 percent of last year’s total and “other”—which was primarily cleantech IPOs—made up 38 percent and represented the biggest technology sector. Fletcher was an investment banker at Goldman Sachs for nine years before joining GCA Savvian, an investment banking advisory firm formed in the 2008 merger of Japan’s GCA and the U.S. firm Savvian advisors.

There have been a total of 21 venture-backed IPOs so far this year—including Carlsbad, CA-based MaxLinear—in comparison to 264 in 2000 and 70 in 1990. “We’re now on a pace for 40 IPOs this year, so it’s just a fundamentally different market,” Fletcher says. (Three other companies in the San Diego area that have filed for IPOs are still waiting in the pipeline: Trius Therapeutics, Prometheus Laboratories, and Fallbrook Technologies.)

In contrast, though, Fletcher says there have been far more venture-backed mergers and acquisitions in recent years. In 2009, when there were just eight IPOs, he says there were 326 M&A deals involving venture-backed companies. In 2008, there were 7 IPOs and 380 M&As, and in 2007—before the recession—there were 78 IPOs and 483 M&A deals.

At a time when the market metrics for IPOs tend to be discouraging, Fletcher says the indicators for corporate buyouts are looking good: The S&P 500 has gained 75 percent this year, and companies also have more available cash after cutting dividends, cutting their stock buy-backs, and cutting their employees. “When you combine [the availability of] much

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Author: Bruce V. Bigelow

In Memoriam: Our dear friend Bruce V. Bigelow passed away on June 29, 2018. He was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Bruce Bigelow joined Xconomy from the business desk of the San Diego Union-Tribune. He was a member of the team of reporters who were awarded the 2006 Pulitzer Prize in National Reporting for uncovering bribes paid to San Diego Republican Rep. Randy “Duke” Cunningham in exchange for special legislation earmarks. He also shared a 2006 award for enterprise reporting from the Society of Business Editors and Writers for “In Harm’s Way,” an article about the extraordinary casualty rate among employees working in Iraq for San Diego’s Titan Corp. He has written extensively about the 2002 corporate accounting scandal at software goliath Peregrine Systems. He also was a Gerald Loeb Award finalist and National Headline Award winner for “The Toymaker,” a 14-part chronicle of a San Diego start-up company. He takes special satisfaction, though, that the series was included in the library for nonfiction narrative journalism at the Nieman Foundation for Journalism at Harvard University. Bigelow graduated from U.C. Berkeley in 1977 with a degree in English Literature and from the Columbia University Graduate School of Journalism in 1979. Before joining the Union-Tribune in 1990, he worked for the Associated Press in Los Angeles and The Kansas City Times.