A quarter with no venture based firms going IPO ?
SOURCE: The Washington Post
DATE: July 1st, 2008
Mohit Soapbox:
According to an article in Washington Post the # of venture based firms gone public this second quarter of 2008 is zero! A report released by the National Venture Capital Association says that for the first time in thirty years a quarter has gone by without venture based firms going public. With the economic crisis taken a global shape and no countries capital market immune from the downturn the firms which had IPO plans are all in a wait and see mode.
This continues to bring in bad news for the startup community as the venture funds are seeing their exit doors closing and longer wait times in realizing their investments. The current environment is also tough for the ’specialist’ firms which have focused on building a niche to survive the downturn and differentiate them in the crowded marketplace but have limited capital exit strategies available to them at this stage. The M&A has seen a similar slowdown and firms have seen their valuations slide down and the buyers willing to wait it out. Smaller specialized M&A with earnouts and performance based payouts are happening but at a minimal level.
A few of the Indian outsourcing firms which have gone public over the last year or so have seen their stock price continue to plummet (eClerx) or stay below the IPO level (Genpact). A recent report by Forrester also showed that the top three large Indian firms are continuing to increase the gap with the other outsourcing players in the market and take a lead in revenues and market share.
A # of specialized firms which we have been speaking too are figuring out ways to ride the downturn and how to continue to survive and grow. The challenge the smaller firms have to deal with is that they have to differentiate themselves by building domain expertise and specialization which gets them in the door with clients and can offer a value proposition to clients. The downside of this is that the firms market opportunity gets narrowed and specialized firms will struggle to reach a critical goal to go IPO.
The positives we see in the market for specialized firms is that people who are smart to manage cost and build domain expertise will have a less crowded market to compete in and grow when the spigots open up. The current focus has to be for the firms to survive but build a niche. The good news is that a number of clients we work with for their outsourcing service selection and due diligence are now willing to work with specialized firms. It is more than just cheap labor.. No longer is TCS, Infosys or Wipro the only choice specially for mid size firms. The larger vendors have also shifted their focus on larger, horizontal deals and getting to strategic customers.
We have seen a number of cases where the larger corporates with existing large vendor relationships are more open to engage specialized firms.
The positives of this could also be that the venture firms are now looking to invest in firms with longer time horizona aka early stage investments and are willing to spend more time with their existing portfolio firms to help them survive.
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