IPOs out, venture capital in

Dotcoms are more likely to tread the venture capital path following this week's stock market falls which saw some internet companies lose more than half their market value.

While the venture capital market is not expecting a huge rush by startups requiring funds, VC executives told TheWire they expect more companies to consider private funding rather than an early initial public offering (IPO).

"The niche crashes have temporarily pulled down the technology market for a while, but on the whole it is still full steam ahead," said Randal Leeb-du Toit, regional coordinator for VC networking group First Tuesday.

"Companies will just tack differently -- they will not go straight to IPO and will have to work a bit harder in their boiler rooms for their venture capital, probably giving away a little more equity than before as their valuations will be down," he said.

More opportunities will exist and securing venture capital will become a stronger part of moving from ideas to concept, Leeb-du Toit said. "VCs are going to be a lot more important again." Companies will be looking for first and second round capital in addition to seed funding before heading for the stock market, he added.

For Vivian Stewart, co-founder and chief technical officer of Tinshed, the recent market movements expose the risks of the volatile share market. "This makes evaluation more realistic. You can't guarantee a sound return simply through an IPO," he said.

"An IPO is not going to be as much of a sure thing anymore. A hell of a lot more risk has been introduced into that equation with the deflated market."

Stewart said recent events will mean people will be less willing to invest in businesses without better fundamentals. "It's going to be more of a return to creating sustainable businesses. Every dotcom will say they do create a substantial business, but perhaps this will really make it hit home."

Allan Aarron, an executive director with venture capitalist Technology Venture Partners, said that although he expects little change in the number of opportunities for his company, more startups will "definitely" choose the VC path.

"A premature listing is in nobody's interest. We think companies are better off staying private for a while, until they've proved their business models," he said.

The misguided notion of "why get $10 million from a VC when we can get $40 million from the public market" has led many companies to list without proving their business success, Aarron said. "Clearly there were a lot of companies overvalued in investors' eyes. My view is that a lot were overvalued because of the weight of money behind them."

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