Remember when taking your company public seemed like a sure way to become a billionaire?
Those days may be over.
From 1980 to 2000, an average of 311 companies per year went public in the U.S. Since then, the average has been 102 initial IPOs per year. Overall, from 2001 to 2011, the total number of small businesses going public plummeted 80 percent.
Plenty of analysts chalk up the decline to new government regulations, such as the Sarbanes-Oxley Act of 2002 and the 2003 Global Settlement, which creates legal hoops entrepreneurs must jump through. These regulations also make it more expensive to go public.
But many in Silicon Valley and throughout the nation's start-up scene believe the IPO decline is the result of a shift in entrepreneurial mindset: Perhaps the strains of going public have made an acquisition a more palatable decision for today's founders.
"I would say most companies that are started and founded will believe in their minds now that they're going to get acquired," says Jeff Stark, an audit partner at Sensiba San Filippo, a Silicon Valley accounting and consulting firm. "There's been a real watering down of expectations in the valley--maybe for some good reasons, and maybe for some perceived challenges."
Stark's anecdotal feeling is backed up by hard evidence. In April 2012, researchers from the University of Hong Kong and the University of Florida published a report interpreting the soggy IPO market, titled "Where Have All the IPOs Gone?"
Their conclusion: Entrepreneurs and VCs are seeking out acquisitions--not IPOs--for venture-backed start-ups.
"We posit that the advantages of selling out to a larger organization, which can speed a product to market and realize economies of scope, have increased relative to the benefits of operating as an independent firm," the authors of the report wrote. "Consistent with this hypothesis, we document that small company IPOs have had declining profitability, consistently low returns for public market investors, and an increasing likelihood of being involved in acquisitions."
The authors go on to conclude that "The evidence is consistent with an environment of 'eat or be eaten,' where slow organic growth as an independent company is less attractive than quickly achieving economies of scope via being acquired."
Venture capitalists will be eyeing a portfolio company's exit from the day they decide to write the entrepreneur a check. Marc Andreessen, the founder of Andreessen Horowitz, the venture firm that's invested in companies such as Twitter, Facebook, and Zynga, has experienced the transformation firsthand.
Beyond financial metrics, Andreessen believes the first tech bubble--and the ultimate crash--weighs heavy on the minds of entrepreneurs when considering going public.
"We're still living through the hangover of the 2000 crash," Andreessen recently told Fortune. "So, the 2000 crash was a generational psychological event that still weighs very heavily on people's minds for anybody who lived through it. And just like when it looked like we were starting to get back up on our feet again, then the financial crisis in 2007 and 2008 hit."
Fear of Losing Control
The entrepreneur's pyschology here is important. According to experts, many young entrepreneurs are are beginning to wonder if an IPO is an exit strategy that's right for them. While economists view the decline of the IPO through the lens of market conditions, others view the shift as specific to the mindset of Gen Y entrepreneurs.
"If you're really going to go public, sure Sarbanes-Oxley is hard, but that won't stop a good company from going public," says Jeff Stark. "It's more that they're starting to think, 'Why do I need to go public? What's the best exit? Is the cost benefit analysis there for me? Do I have the right team in place to take this public?"
Tim Faley is the managing director of the Zell Lurie Institutive of Entrepreneurial Studies at the University of Michigan, where he teaches young entrepreneurs-to-be on navigating the start-up ecosystem. Over the past decade, however, Faley has noticed a shift among his students.
"It's the millenials who are looking at work and life very differently," he says. "They start with passions or interests. It's opposed to even 10 years ago, it was, 'I have this widget and I want to commercialize it and I want to get it out there.' It's very different. They're really trying to figure out how to build an entrepreneurial career and not just flip a product. So I think losing control is a big factor. You have a lot more influences, more scrutiny, more public pressure, and that's not what they want."
Faley sees these conversations happening at the venture level, too.
He adds, "I don't see IPOs being a strategy of the VCs I talk to."
Faley, who has invested in about a half-dozen start-ups, says all of the companies whose boards he sits are are angling for an acquisition or merger.
"On the M&A side, they're making it more palatable," he says. "They always said you'll be a wholly owned subsidiary and be completely independent. But more and more that's actually happening."
Wisdom From the IPO Elders
Andreessen is not the only VC feeling aftershocks of the first bubble. Plenty of seasoned entrepreneurs who lived through the first tech bubble may be less likely to want to take a company public.
Todd Vernon is one. Vernon co-founded Raindance Communications in 1997, and took the company public in 2000, raising $56 million. Six years later, the company was acquired for $110 million.
In 2006, he founded Lijit Networks, an analytics and advertising firm, which sold to Federated Media last October for an undisclosed sum. At the time of the acquisition, Lijit had already raised $29 million.
Speaking of IPOs, he says, "It was the exit back in '98 and '99. It's what everyone did. In retrospect, it wasn't super healthy." That's because once your company is public, he says, "You're so far away from home, it's like, you can't even remember how to get home."
But from his vantage, things have changed. He built Lijit Networks with an acquisition--not an IPO--in mind.
"Historically, the IPO was the liquidity event," he says. "Entrepreneurs didn't focus on the M&A. It's completely different now. I think very few people focus on IPOs as the liquidity event and more kind of hey how can I build a strong company that's attractive to someone else."
"It's never been a goal of mine to take something public," says Smith. "But we did."
Would he be reluctant to take another company public?
"To some extent, morale in a public company is the stock price," he says. "I'm reluctant to have that be the focus, and it's not what motivates me. My point of view is to take that conversation off the table and have it not be topical. If we're executing, and if we're building great products, and making customers excited, we'll have plenty of options."