SAN FRANCISCO The Silicon Valley IPO has lost its cachet, and big investors need to pay attention.
That's the view of two prominent startup chief executives awash in offers of private investment, who don't think the headache of going public is worth the effort.
An IPO used to be the one mark of success for a new technology company, but as regulations have increased and more private investors have signaled interest in the sector, the prestige and financial necessity of an initial public offering has waned.
High profile IPO disappointments like Facebook (FB.O) and Zynga (ZNGA.O) have not helped the case for public markets.
Technology investors, particularly large public pension funds, need to adapt to that changing reality and adjust their mindset or end up missing out, Dave Goldberg, chief executive of SurveyMonkey, told the Reuters Global Technology Summit on Tuesday. SurveyMonkey raised $800 million this year from investors including Tiger Global Management and Google Inc (GOOG.O).
Pension funds help drive a 10-year investment cycle for venture capitalists and private equity funds, which aim to cash out at the end of that period, Goldberg said.
"It's important to choose initial investors who are not twitchy and rushing for an exit," said Roelof Botha, a partner at venture capital firm Sequoia Capital. "Wall Street's quarter-by-quarter lens may make the CEO make sub-optimal long-term decisions."
Silicon Valley companies including Twitter and Automattic, owner of WordPress, are among other more-established startups that have eschewed an IPO in favor of tapping new late-stage financing.
Kevin Hartz, CEO and co-founder of Eventbrite, has experienced both sides of this financing conundrum. Xoom Corp XOOM.O, which he also co-founded, completed an IPO recently. Around the same time, Eventbrite raised a new round of private financing that included a big secondary transaction with Tiger Global.
Sequoia invested in Xoom nine-and-a-half years ago and when the company completed its IPO, the venture capital firm did not distribute any Xoom shares to its limited partners, Botha noted.
"It's a headache to be out in the public markets," Hartz said. He was CEO of Xoom from June 2001 to October 2005, but is now just a director and spends most of his time running Eventbrite.
Eventbrite had a "quasi IPO in effect" this year to raise money for the company and give employees liquidity, he explained, adding that it "went remarkably smoothly."
Private secondary transactions are an increasingly common feature of late-stage financing. The deals allow existing investors and long-time and former employees of startups to sell some of their shares to new investors, reducing pressure to do IPOs.
These transactions also let new investors, such as hedge funds and even mutual funds, put money into private companies. Tiger Global, a top technology hedge fund and private equity firm, is one of the biggest players in this area.
There is so much money chasing such deals now in Silicon Valley, though, that some fear it is creating bubbles that would be burst by an IPO.
"Because of the money available ... there's going to be a lot of private valuations that potentially aren't going to correlate with what the public market is thinking," said Coatue Management's Thomas Laffont.
Not all of Silicon Valley has soured on the time-honored IPO. For enterprise-facing startups, with large corporations as customers, an IPO remains a significant confidence booster.
When an enterprise software company is trying to get a corporation to sign a five-year contract, having a few years of cash in the bank helps a lot, Goldberg noted.
"They have viewed it as a branding event," he said, "something they can show customers they have the capital to be around for a long time."
Recent IPOs that have done well include enterprise software provider Workday Inc (WDAY.N) and professional social network LinkedIn LNKD.N, while consumer Internet companies like Facebook, Zynga and Groupon (GRPN.O) performed poorly.
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(Reporting by Alistair Barr, Sarah McBride and Edwin Chan; editing by Ed Tobin, Peter Henderson and Phil Berlowitz)