Monday, April 5, 2010
By the Numbers: The Returns from Southern California IT IPO's 1995-2009
On March 10, socaltech.com profiled a study of the financial outcomes of 700+ southern California IT startups from 1995-2009 completed by Jon Funk of OceanRoad Partners and others. This Insights and Opinions column by Jon is the first in an occasional series delving deeper into the data.
One of the numbers most interesting to venture capital firms, their investors and other observers is how successful Initial Public Offerings are for venture capital firms and others which invest prior to an IPO.
In an effort to address this issue, we have created a simple arithmetic calculation to determine a proxy value for potential returns to private shareholders in companies that complete an Initial Public Offering. This approach can be used to hypothesize the scale of return available at the time liquidity is available. We have applied this methodology to the 67 IPO's completed from 1995-2009 by southern California venture capital-backed and self-financed IT companies.
Initial Public Offerings are an event that can lead to liquidity for private investors in emerging companies. However, senior management and large private shareholders, which usually include venture capital investors, are nearly always precluded from selling a material portion of their holdings until six months after the IPO is completed.
Shareholders with the opportunity to sell six months after the offering are usually considering a substantially different value of their holdings as compared to the first day of trading. Further, in the following months, each investor makes individual sale decisions based on its own objectives, guidelines and assessment of the company's prospects. Thus, knowing how (More...)
Read the rest of Jon's analysis.