NEW YORK ( TheStreet) -- Although the tech industry saw more IPOs than any other sector in 2010, several well-known start-ups expected to go public -- Zipcar and Everyday Health, for example -- didn't. While the hesitation was partially due to the down economy, there's a sentiment hanging over high-profile tech start-ups that is left over from the dot-com bust days: Going public has lost its luster for reasons ranging from the burden of Sarbanes-Oxley regulation to stock-price volatility. Today, several notable up-and-comers, Groupon, Yelp and, of course, Facebook, have raised massive amounts of capital without a need for the public markets. For them, say Silicon Valley VCs and entrepreneurs, remaining private is an increasingly appealing alternative.
Traditionally, for companies looking to pay back investors, going public was a more attractive next-step option than a sale. By going public, founders typically earn more money and can stay involved in the day-to-day operations of their business. An initial public offering also can be used as a marketing tool for a lesser-known private company to raise its profile. But while an IPO used to be the defining mark of a start-up, this belief has shifted. "From 1999 to 2000, the IPO was a feather in your cap and was something many entrepreneurs sought out as a goal -- today they're approached with a lot of caution," said Scott Dorsey, CEO and co-founder of marketing software company ExactTarget in Indianapolis. ExactTarget pulled its IPO offering in 2009 in favor of a $140 million venture capital raise. "We grew from 550 employees to 850 by the end of 2010 and did three acquisitions -- why go public?" The IPO is no longer seen as the "be-all, end-all," said Ira Cohen, a managing director at Signal Hill, a firm that advises venture capital firms and their portfolio companies. That's true for social gaming company Zynga, the creator of now-ubiquitous Farmville. Zynga generated a reported $500 million last year and has said it is unlikely to seek an IPO this year. For Zynga, a public offering is less a sign of validation, and more of just another avenue to raise funds. Entrepreneurs at other highflying start-ups feel similarly. "The IPO isn't an exit; it's at best the beginning of another phase of a company," said Samir Arora, CEO of media company Glam Media in Brisbane, Calif., which has raised $135 million in venture funding and has long been rumored as an IPO candidate. "If you regard a company with 250 to 500 employees as the early teenage years of a company going into adulthood, it's just the start."
Barriers to Going Public Increased government regulation is a primary driver for companies choosing to forgo an IPO. In particular, Sarbanes-Oxley, which instituted more stringent accounting rules, can discourage companies looking to go public. "The rules around being public are cripplingly expensive, so cumbersome, and so onerous," said Peter Townshend, a lawyer at McDermott Will & Emery who advises venture-capital based companies and investors. Recent developments in the public markets such as the paring down of research departments within investment banks, as well as the emergence of high-frequency traders who aren't interested in smaller companies, are contributing factors to venture capital-backed start-ups remaining private, said Jeremy Smith, Chief Strategy Officer for SecondMarket, who works with private company shareholders to help them sell their shares.
"We're hearing more and more that entrepreneurs want to stay private because they see it as a competitive advantage," Smith said. "Back in the day, you had no choice but to go public, but we've shown them
that staying private is a viable path for your company." Some private companies may also be looking to avoid the pressures from Wall Street that public entities must endure, like answering to a wide body of shareholders and the wild stock-price fluctuations that can follow events like missed quarterly targets and analyst upgrades and downgrades. Bigger, proven tech giants like Cisco ( CSCO), which saw its stock price plunge 17% the day after it reported strong first-quarter earnings but weak outlook, are better positioned to deal with investor reactions, say tech watchers. "If you miss your earnings even by a penny, the Street is so harsh," said Greg Gottesman, a managing director at Madrona Venture Group in Seattle, which has invested in Jambool, a virtual currency company sold to Google ( GOOG) last year for a reported $75 million. "Some start-ups may want to focus on building for the long term; going public makes you focus on your quarterly numbers." Another factor contributing to the decision for start-ups to remain private is a suspicion of the public markets, said George Zachary, a partner at Charles River Ventures who sits on the board of Twitter, another start-up long-rumored to be eyeing the IPO market. "Entrepreneurs are concerned that the public markets are still weak, and will continue to stay weak," he said. "I've heard from companies that if they receive an acquisition offer they're more likely to take it than consider a public offering." While the IPO market has rebounded somewhat, there's still room for growth. There were 32 venture-backed IPOs in the fourth quarter of 2010 -- more than double the number in the third quarter -- although much of this growth was driven by Chinese companies, according to the National Venture Capital Association.
To Sell or Not to Sell? While M&A is historically less lucrative than going public, founders are now better off selling their companies because of the harsh economic and regulatory environment, said longtime venture capitalist Tim Draper, whose firm, Draper Fisher Jurvetson, has funded companies like Baidu, Hotmail and Skype. "Companies are now making the decision to sell out even if that means they lose their vision, they limit their upside, they don't create as many jobs and they don't get to continue to drive their business forward," he said. Firms regarded as top IPO candidates that recently instead chose to sell include content farm Associated Content, which was bought by Yahoo! ( YHOO) for $100 million; social gaming company Playdom, purchased by Disney ( DIS) for $763 million; and marketing software company Aprimo, acquired by Teradata ( TDC) for $525 million after pulling its IPO in 2008. Despite all this, analysts are still expecting a few large tech public offerings this year. After stalling for months, highly-anticipated IPO Demand Media priced its offering Wednesday, and business-oriented social networking site LinkedIn is expected to file soon, as well. So will a watershed IPO spark a stream of other prominent VC-backed companies to file, too? Not necessarily, said Paul Bard, vice president at Renaissance Securities, a Greenwich, Conn.-based IPO research firm. "A high profile VC-backed company going public will have a positive effect on the market, but I don't know if it will open up the flood gate," he said. "These companies have so much private capital being thrown at them in the private markets, they're saying what's the rush?" --Written by Olivia Oran in New York. >To follow the writer on Twitter, go to http://twitter.com/Ozoran. >To submit a news tip, send an email to: firstname.lastname@example.org.