Why the VMWare IPO Doesn't Dispel the Possibility of Crisis, But May Signal a Shift

15 Aug

VMWareThe successful IPO yesterday of VMWare does little to concerns I have flagged in two of my recent posts about how the credit crisis and shifting economic conditions may be making the US a less attractive and successful center for entrepreneurship (“Buckle Up: Why Entrepreneurs Should Be Scared of the Shifting US Economy” and “Will a Debt Crunch Drive Smart Minds from VC, Entrepreneurship?”). The basic reason is that an IPO is an equity event, with investors buying up ownership of the firm, rather than a debt-leveraged buyout or credit-based investment that will be paid back.  It neither proves that talent is continuing to flow to the startup world, or that weak economic conditions are not affecting the chances of successfully launching a business.

I am writing today in response to a short message I received from Tony, a friend and reader of this blog, asking whether VMWare’s IPO changed my opinion about current conditions for entrepreneurship. VMWare’s first day of trading witnessed the stock spending most of its first day well above the opening price of $29 a share, closing in the mid $50s (See Alarm:Clock – “VMWare IPO Crushes It“).

While the VMWare IPO says little, if anything, about the credit crisis, it may indicate that the market for “exits” for entrepreneurs may be shifting back in the direction of equity markets. In recent years, private equity buyouts have become a credible exit option for startups, with large investment firms using significant debt leverage to purchase an entrepreneurial business. This is in addition to the more traditional exit for startups, through acquisition by another firm in its industry, which would typically involve a significant amount of debt to finance the purchase. If credit is tight, and the cost of borrowing remains too high, these options could well become more expensive, raising the bar that startups must meet before they have a chance to be acquired.

Therefore, an IPO may very well become the most attractive way for entrepreneurs to sell their businesses and “cash out” on their work.  It is not dependent on the credit market, and relies instead upon the perceived value of the company.

Declaring IPO as the clear path forward on the basis of a single exciting tech IPO would, of course, be premature. More evidence in the form of other successful IPOs, weaker acquisition and buyout numbers would help support the conclusion. In the meantime, however, it remains an interesting trend to be on the lookout for.

So what about the gloom and doom facing entrepreneurs that I described in my previous posts? It seems a successful IPO (of a company that was doing well and preparing for this event well before the credit crisis began last month) will do little to convince smart candidates that moving to an operational position in a startup is the right move to make in todays market. Nor does it mean that a weaker dollar and slowing US economy are any less of a threat to startups and their VC backers.

One Response to “Why the VMWare IPO Doesn't Dispel the Possibility of Crisis, But May Signal a Shift”

  1. Tony August 15, 2007 at 4:47 pm #

    Wouldn’t exit options shifting away from PE be a good thing? Personally, I think IPO’s the best exit option – or at least it should be for a true entrepreneur. People whose end game is selling the thing off to PE or to another firm aren’t in it for the long haul, and so aren’t as willing (or well-incented) to build a good company. PE’s the worst, and I’m glad it’s becoming harder. What soulless hack would want their baby raided by PE?

    As for joining a startup? A successful IPO is EXACTLY what I want to see. It’s a beacon in a bleak time saying that with a great idea and a great product, there will be a great return. My own investment in my new company is validated by the hopes of a greater return in the future – and not just a great experience along the way.

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