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VC Andreessen: Skip the IPO

Silicon Valley pioneer says keeping a company private is a "logical" move for entrepreneurs--but bad news for investors.

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If you're a founder who'd rather build your company privately instead of opting for an early IPO, you may have just gotten support from an unlikely source.

Venture capitalist and Silicon Valley pioneer Marc Andreessen, co-founder and general partner of the VC firm Andreessen Horowitz, told a crowd Monday night that the "logical response" for many of the best new companies is now to resist going public.

According to Andreessen--whose comments came during a wide-ranging discussion with Fortune managing editor Andy Serwer at the opening of this year's Fortune Brainstorm Tech Conference--the gradual effects of laws like Regulation Fair Disclosure and the Sarbanes-Oxley Act have made it much more difficult for companies to operate publically today.

And there's another inherent problem with going public, he said:

There's an embedded conundrum in IPOs, which is that if they are priced in a way where there's a 100-percent first-day pop, they get reported as huge successes, right, and everybody's all happy. Like the press is all happy because the stock has gone up a lot, the early investors, people who bought the IPO are happy because they made a lot of money overnight.

The down side of that, which I've had with my companies a couple times, is that the company has left an enormous amount of money on the table. And sometimes that's fine and everybody's happy, but sometimes later on in life you wish you had that money. Because what that means is the offering was underpriced relative to the true demand.

A rejection of IPOs, of course, eliminates one way VCs can cash out after investments. But Andreessen also said he thought the delayed debuts also had a downside for public investors:

The number of companies that are public has been cut in half, right, which means that all of the investors who invest in public companies are now fishing in a much shallower pool, much shallower pond. And those include all the pension funds, all the mutual funds, all the actual investors that actually represent ordinary people now can't invest in a lot of the interesting new things, they can't invest in the private companies.

So, we're creating this kind of two-tier investment world where if you're a public market investor, there are very few things for you to invest in, and if you're a private market investor you can do whatever you want.

And in a sense, that's really good for a guy like me because we can finance these companies. It's not preventing the companies from getting financed because we can do it privately, but it is delaying the IPO. It does mean the pension funds and a lot of the public participants don't get to benefit from the early growth of these companies, which is historically a big driver of returns.

 




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