Exits dry up for venture-backed startups

The Wall Street Journal recently asked a highly poignant question: "Who's going to fund the next Steve Jobs?" The Journal asks the question in light of a startling piece of trivia: The second quarter of 2008 marked the first time in 30 years that no venture-backed companies went public. Not a single one.

Why? Through punitive regulations like Sarbanes-Oxley, we may have dried up the appetite for public exits, given that a private buyer means less red tape:

This is bad news for the U.S. economy. Does anyone think that we would be better off if Bill Gates and Michael Dell had sold out to corporate behemoths early in their careers, instead of leading their firms for years as public companies? Would consumers enjoy the same vibrant market in Web services if Yahoo had gobbled up a nascent Google? How powerful would our computers be if Intel had become an IBM subsidiary, instead of going public in 1971?...

By and large, founders of Internet startups are not creating companies with the dream of conquering the world, but rather with the intention of selling to Google, eBay, Yahoo or Microsoft. Our society should be encouraging these entrepreneurs to dream big. Instead, they're looking for the exit before they have to deal with the burdens of our public markets. "All things being equal, 85-90% of our portfolio company CEOs would say they would rather be acquired than go public," says Steve Harrick of Institutional Venture Partners.

At some point, this lack of big exits is going to find its way back into the venture capital firms that continue to pump money into startups, though even that money has started pushing into later-stage investments rather than early-stage investments. In short, if there are no exits to deliver out-sized returns, institutional investors will simply stop funding venture firms...which will stop funding startups.

In the recessionary period we're currently navigating, technology companies have stood firm in delivering excellent returns to their investors. What happens when the next Microsoft sells out to IBM? When a would-be Google opts to be consumed by Yahoo!?

In sum, will the technology economy of necessity cling to a few global brands, rather than diversifying itself through the next Google, the next Apple, the next Microsoft?

I hope not, but we need to open up the public markets to more startups by making it less painful to be a public company. The Enrons of this world are going to happen regardless of ever more burdensome regulations. It's the good guys we're punishing, not the bad guys.

[Beenthinking]

As with most security measures, the outcome is to keep the good guys honest...not exactly a security measure now is it? Relative to investing, having been a GP for 12 years, I am completely astounded at the lack of early stage financing. No one does it anymore. I don't know one VC that actually invests in early stage companies, although many claim to. So there are lack of public exists but there is also a lack of financing these early stage high risk ventures at well. To your point, there may be a new Apple or Google out there, just not during these times.

[The_Decider]

I don't think it is a bad thing at all.

The kitchen sink approach to software(don't kid yourself, Apple is a software company, when was the last Apple created a processor or hard drive?) development is going by the wayside and that is a positive. Companies should focus on one or two products. To understand why, look at Microsoft. They try to be all things to all people and that is the main reason they fail in terms of quality and innovation. They have too many fingers in too many pies and are slipping into irrelevancy because of it.

It will happen to Apple as they force more and more products out the door.

[The_Decider]

When you sell out to Wall Street, quality and customers no longer matter. You can't put out an outstanding product if it means your stock will drop a little. And in this world that worships mediocrity that happens all too often.

Look at Yahoo, the fact that they are a publicly traded company is what is hurting them right now. I am willing to bet that they would be bigger and stronger if they were a private corporation. They could also have ignored Microsofts ridiculous offer and moved on with not having to deal with shortsighted greedy idiots like Icahn. They fact that they went public is exactly what is hurting them.

In short money ruins everything. Or rather the pursuit of maximizing every possible area of your business is what ruins you.