Tech Start-Ups Wary of IPOs

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."

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