Will the US IPO Market Ever Recover? Can AIM Provide A Viable Alternative?

Quarterly exit data has just been released by Thomson Venture Economics and the NVCA.  Although there was an increase in IPO activity, there overall trend remains flat. 

In the second quarter of 2006, 19 venture-backed IPOs raised a total of $2 billion, up significantly from both the first quarter of 2006 and the second quarter of 2005. 

M&A activity was $3.2 billion in Q1 of 2006.  There were a total of 86 M&A deals with 34 disclosing values.  Average disclosed deal value was $95 million in Q2 of 2006. These numbers are down somewhat sequentially and from last year.  Roughly 29% of those deals returned more than 4x the investment, 42% returned 1x-4x, and only 29% less than the amount invested.  It took almost 6 years on average between founding and M&A exit. 

Levels are still not high enough to provide venture funds returns in excess of competing asset classes, including buyouts and hedge funds. 

Three of these IPOs were US companies on foreign exchanges, 2 on London’s AIM (Alternative Investment Market) and 1 on the London Stock Exchange.  We are encouraged about what we’ve been learning about AIM, which could provide a reasonable alternative for venture-backed companies to go public. 

What is AIM?  It was created 11 years ago as an affiliate of the London Stock Exchange to list smaller companies.  The structure is friendly to smaller stocks.  UK investors receive tax benefits by holding long-term, discouraging the volatility typical on NASAQ.  Relative to NASDAQ, where Sarbanes Oxley makes disclosure problematic and expensive, disclosure rules on AIM are reasonable.  Given Spitzer’s hobbling of the research function, it’s impractical to list a company on NASDAQ with a market capitalization of less than $500 million.  AIM is geared to companies below $100 million.  Until recently, company sizes, exchange volumes, and international investor interest has been low to modest.   A few US technology companies have listed on AIM, allowing financing, but less trading liquidity than NASDAQ.  Liquidity for venture investors has been enabled more secondary offerings than open-market sales.  That appears to be changing, with activity increasing on AIM. 

We’ve wondered how venture-backed companies get large enough to get on NASDAQ.  Historically, NASDAQ’s structure supported more risk taking behavior, allowing companies with modest revenue levels to go public with growth stories, using IPO proceeds and the marketing event of on IPO to validate competitive positioning against larger legacy companies.  Over the last few years, we’ve observed most technology companies have struggled to scale businesses without the help of an IPO with buyers of technology cautious about dealing with private companies.  A few companies have crossed the marketing chasm by taking more time, raising more money privately or merging with other private companies.  If AIM can show it can market technology growth stories, AIM could provide a bridge between venture and NASDAQ, with successful companies achieving the scale needed to move over to NASDAQ.

Based on discussions with investment banks, we expect more US technology companies to list on AIM and will be monitoring trends in the market closely.