Hoser’s Perspective » Blog Archive » You shall not pass!!! (or IPO)

In light of all the recent Google App Engine coverage and fallout from the 37 Signals mishap, I think I’ll pass on rehashing the various intricacies of this new (and cool) service. Nevertheless, Fred Wilson from Union Square Ventures managed to stir up the finance community today with his post on the path to exits and the blunders that big M&A transactions are causing (SIA article here). His post covers the current drought in the IPO market and the problems that keep occurring when the internet giants attempt to consolidate and find focus within their respective industries. For instance, the following sections illustrate his point exceedingly well:

The IPO market is closed and frankly hasn’t really been that robust (at least for technology/web offerings) since the crash in 2000. And even when it’s open, it’s nuts to take any company public that cannot deliver consistent and predictable growth and earnings quarter over quarter for years. That’s what the public market investors demand and they should demand that as they have no control over the companies they invest in. The public markets should be for the best companies. Apple, Google, Amazon, eBay – those are good public companies. Skype, YouTube, and the current Facebook are not.

So if you can’t take a company public, how do you get out? M&A has been the primary answer in the web/tech sector for the past eight years. And it’s been a great period to sell companies. We’ve sold three in the past couple years out of our Union Square Ventures portfolio, delicious, FeedBurner, and TACODA, to Yahoo!, Google, and AOL, respectively. Were we happy to take their money? Yes. Were we happy with the outcome? Yes. Were they good buys for their new owners? On the face of it, yes.

Clearly his point about the IPO market being closed is absolutely right considering we only saw 1(?) in the month of March and that was not a valley occurrence. On the flip side, M&A transactions have continued as various web apps have been gobbled up by larger organizations looking for something to revitalize their service. AOL’s BEBO acquisition was questionable for instance, and other major transactions have yet to bear fruit for their owners.

Case in point, today Meebo found itself in a precarious situation where they clearly have been unable to achieve their desired valuation and sale price for an M&A transaction but are also in need of cash and therefore have decided to raise another round of financing (TechCrunch coverage here). This financing though will not likely come from venture capital and may involve a strategic partnership or investment for minority ownership by their primary buyer-targets.

Clearly it is an uncertain market right now and it seems more than likely that what consolidation does occur will happen at the hands of internet giants who are unable to manage their acquisitions. These companies that are unable to finance their growth through an IPO or appropriately priced M&A transaction will soon be faced with the same issues affecting Meebo. It is definitely an interesting time to be watching the tech sector and web app market as the economy continues to head down a shaky path.