After a long dry spell, the venture capital industry is hoping an upcoming initial public offering by Web search giant Google will help start a new flow of cash to young companies. But despite a pick-up in venture financing in the first quarter, the money now being raised bringing new companies public is just a light rain compared to the downpour of cash that flooded the market at peak of the tech boom in 2000.
Figures released Monday show that venture-backed companies took in $5 billion in investments in the first quarter, a healthy gain from the $4 billion collected in the first quarter of 2003. But investment is still down sharply from the $27 billion raised in the first quarter of 2000 at the height of the market bubble, according to a quarterly survey by Venture One/Ernst & Young.
Google, which got $25 million in venture funding from Kleiner Perkins Caufield & Byers and Sequoia Capital in 1999, is widely expected to announce plans for its IPO this week. One reason for the timing is a Securities & Exchange Commission regulation that requires companies with more than 500 shareholders and $10 million in assets to make a financial filing within 120 days of the year they reach that threshold.
Having awarded stock options to most of its 1,000-plus employees, Google is believed to have triggered the rule last year, giving the company until Thursday to provide details on its finances for the first time.
Google theoretically could just file an annual report for 2003 without pursuing an IPO, but most observers seem to think that strategy would make little sense. That’s because Google would encounter all the compliance headaches of a public company, incurring millions in annual expenses, without reaping any of the financial benefits.
Ironically, archrival Yahoo! is also in line for a huge windfall from Google’s IPO. Yahoo invested $10 million in Google in mid-2000, when the two companies were still friendly, acquiring a stake that figures to be worth hundreds of millions of dollars after an IPO.
Until a filing is made, investors can only speculate about the details of the offering. The company is believed to have revenues approaching $1 billion a year. The stock offering could raise as much as $2 billion for a 10 percent slice of Google, valuing the entire company at more than $20 billion. That would make its IPO one of the biggest ever by a technology company and deliver huge returns to its original investors. The lack of hard data has only boosted interest in the offering.
"I think the secretive nature of the company has actually accelerated or exaggerated that interest, that mystery about it." said Martin Pyykkonen, a senior research analyst at Janco Partners.
The buzz surrounding the offering has set investors scrambling to get a piece of the deal. But the excitement has been tempered by memories of first-day "moonshot" offerings of the 1990s crashing to Earth.
"I'd certainly be interested in getting allocation on the IPO. In the aftermarket, at least in the short term, I probably wouldn't be interested,” said Duane Roberts at Dana Investment Advisors. “I just probably think it's going to come in at a level that's a little rich."
And despite the excitement over Google’s offering, venture capitalists say they don’t see a flood of new offerings coming down the IPO pipeline.
“I don’t believe it breaks some logjam,” Ted Schlein, a partner at Kleiner Perkins, said in a conference call with reporters to discuss a new quarterly report on the venture capital industry.
Schlein said Google going to market would not mean dozens of other companies would make it into the IPO pipeline.
Tech companies aren’t the only ones benefiting from the renewed interest in offerings. In the latest quarter, the life sciences sector, which includes biotechnology and medical devices companies, took in the largest portion of venture funding, with $1.3 billion, or 27 percent of the total.
“Optimism is becoming pervasive as opportunities for liquidity events improve, especially in the life sciences sector,” said Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, referring to the improving market for IPOs and mergers and acquisitions.
Software companies squeaked back into the top spot for the single largest industry category, bringing in $956 million, compared with $943 million for biotechnology firms, which had led for the last two quarters.
While Google investors and employees may be eagerly awaiting the offering, it will likely bring some sobering changes to the company after its breathtaking rise.
Some IPO veterans caution that the process creates major distractions and business culture transformations and warn that Google’s competitive edge could be dulled if iconoclastic co-founders Larry Page and Sergey Brin are forced to march to Wall Street’s prosaic beat.
An IPO “can create more accountability, but it doesn’t necessarily foster long-term value,” said Peter Thiel, who took his Internet startup, PayPal, public in 2002 before selling the company to eBay for $1.3 billion. “(It) changes the emphasis from building a great business to trying to meet the quarterly (earnings) numbers.”
The possible downside of an IPO hasn’t eluded Page and Brin, who launched Google in 1998 while they were graduate students at Stanford University and continue to guide the Mountain View-based company.
While consistently refusing to discuss IPO specifics, both men repeatedly have emphasized they are in no rush to take the company public.
Their reluctance may seem surprising, given that nobody stands to profit more from a Google IPO.
Page, 31, and Brin, 30, are believed to own roughly one-third of Google. If the IPO values the company at $15 billion to $25 billion, as expected, they both would be billionaires.
But Page and Brin also prize Google’s quirky culture, which includes an array of colorful office toys, roller-hockey games, free meals prepared by the Grateful Dead’s former chef and a business mandate requiring workers to devote one day per week to their own pet projects.
The freewheeling approach might be not embraced by hard-nosed investors likely to demand more financial discipline in the perennial quest for higher profits, said Boston attorney David Walek, who has participated in a dozen IPOs as the co-head of Ropes & Gray’s high-tech practice.
“It doesn’t mean that Google has to be a lesser company, but it does mean it will be a different company,” he said.
Once Google goes public, the company almost certainly will lose many employees who will become so wealthy they either will decide to stop working or break away to launch their own startups, predicted Thiel, now a San Francisco venture capitalist.
Google also may lose some of the spontaneity and flexibility of a tech upstart as it becomes more beholden to Wall Street’s short-term interests, said Kamran Pourzanjani, president of PriceGrabber.com, a privately held e-commerce company.
“Being private has tremendous benefits because you can focus more on the long term,” Pourzanjani said.
Based on his experience, Thiel said Google’s management should brace itself for unexpected twists and turns.
“When PayPal went public, we undervalued a lot of the costs and overvalued a lot of the benefits,” he said.
(The Associated Press, Reuters and CNBC’s Cory Johnson contributed to this report.)