Marriage out, serial monogamy in

IPOs were liquidity events, carefully orchestrated to provide still-growing companies with the capital necessary to further their development. Referring to such an event as an exit strategy cast investors in an unfavorable light, implying they were concerned only with cashing out, as opposed to the higher calling of company building. In that context, the proper way to regard an IPO was simply as another stage in a company's long life. This made it infinitely superior to acquisition, the more literal sell-out, which obliterated the basis of company structure and culture.

My memory of this age of IPO innocence was refreshed during a recent trip to Europe, where I participated in a conference panel convened to discuss European entrepreneurial options for listing on various bourses and exchanges. As representatives of EASDAQ, Neuer Markt, Nouveau March? and London AIM debated the merits of Nasdaq vs. local exchanges and/or dual listings, I argued that no one exchange was more appealing than another merely by virtue of physical location; the Internet would enable truly global exchanges.

This met with a fair degree of openness until, in the course of outlining my view, I referred to liquidity using the "E" word. The rest of the panel arose in a unanimously indignant uproar, transporting me back in time to the chaste days of long-term entrepreneur-company relationships, consecrated with golden handcuffs. The disparity threw into relief the extent to which our attitudes here in the United States have changed.

For starters, investors are no longer the only ones seeking an exit. Entrepreneurs themselves are treating their venture-backed creations as a means to an end, and then using that end to forge new beginnings. Marriage is out, serial monogamy is in.

But what will become of the nuclear company, traditionalists wonder? If they're expecting the public to rein in these promiscuous habits and restore moral order, they're in for a rude awakening.

The IPO market for venture-backed companies--particularly Internet companies engineered to reach the public market as quickly as possible--is soaring. In 1999, $19.4 billion was raised in 248 venture-backed IPOs, double the record set in 1996, when the Internet first began to impact the IPO market. At the time, only 11 percent of the amounts raised in venture-backed IPOs went to Internet companies; by 1999, they comprised a staggering 69 percent. So much for rewarding only proven business models.

Happily for both repeat entrepreneurs and their backers, "Internet time" doesn't just refer to product development. Cashing out has never been faster or easier. Five years ago, it took a venture-backed company about six years to go public; now the median time between initial financing and public offering is less than three years.

Furthermore, the stringent rules that once kept entrepreneurs and companies joined at the hip have been relaxed. In the past, it was not uncommon for lockup periods to last for two years or more, but companies going public today demand only six months. And because companies are valued so highly--the median pre-IPO valuation rose from $169.6 million in 1998 to $316.6 million in 1999--entrepreneurs can afford to look for new ventures without waiting to fully vest.

After-market performance doesn't seem to matter. Take, for example, four $200+ million communications IPOs from fourth quarter of 1999: Sycamore Networks, Allied Riser Communications, Tritel and Classic Communications. Only Sycamore Networks is currently trading at a stratospheric level, but all exceeded their original offering prices at IPO.

Short-termers don't need more than that, a point well taken by James Collins and Jerry Porras, authors of the 1994 title Built to Last and their latest offering, Built to Flip.

Paradoxically, acquisition has evolved into the new longevity strategy. Sums like the $6.9 billion Cisco Systems paid for Petaluma, Calif.-based Cerent have elevated acquisition from its former status as the liquidity stepchild. John Chambers, chief executive of Cisco, recently commented that as his company competes with the public market for start-ups, he is prepared to go head-to-head with more dollars, quicker. It's no surprise, then, that the $30.7 billion paid for venture-backed companies in 1999 was more than double the totals for 1997 and 1998.

With such incentive, increasing numbers of entrepreneurs are staying on with their acquirers and using the expanded resources to continue developing their original technologies. Now, there's a strategy.