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Indiana tech IPOs becoming a rarity

January 27, 2017

The term "exit" is used quite a bit in startup circles, and it happens when a company gets acquired or goes public.

Pretty much every company funded by venture capital eventually wants to achieve an exit because it's the most efficient way for its venture investors to realize a return on their investments. Exits signify success.  

Indiana has seen its share of tech acquisitions and tech initial public offerings—but the latter kind of exit is starting to become a rarity. The last one was ExactTarget Inc.'s 2012 IPO. The company that seemed poised to be next—Appirio Inc.—sold itself last fall for $500 million. And the handful of Hoosier tech firms that may be in line to go public for the most part appear years away.

It's not just Indiana—there's an ongoing national tech IPO drought. There are several forces behind the trend, researchers and market observers said, and if they keep up, acquisitions may be the only way out for most Hoosier tech firms.

IBJ's next issue features this story about the decline in publicly traded companies and IPOs, based in part on research by Jay Ritter of the University of Florida, who's been studying the issue for three decades. Among other things, Ritter found that an average of 310 IPOs took place annually in the United States from 1980 to 2000, but that average has hovered around 108 since then.

Here are some of the reasons Ritter and others pointed to:

—Merger-and-acquisition activity. Large companies—which have been blessed with cheap debt and high stock prices in recent years—are typically willing to pay the highest prices for strategic acquisitions, usually higher than what the public markets are willing to pay.

—Small IPO underperformance. The less revenue companies generate at their IPO date, Ritter found, the worse their stocks have performed three years later. So public markets have gravitated towards IPOs by more mature firms.

—Abundant private equity. Global private equity reserves, or dry powder, have nearly quintupled to $1.4 trillion since 2000. This cash has allowed small firms more time to mature before an IPO—if they aren't acquired first.

Despite the decline, IPOs haven't fallen completely out of favor. Indianapolis-based Scale Computing CEO Jeff Ready, for instance, said in 2015 after an $18 million equity capital round that the firm might be interested in issuing public shares as early as this year.

In addition to generating a payday for Scale's investors, an IPO likely would infuse loads of capital into the company for expansion. But Scale, which was founded in 2007, has yet to file for one. Ready didn't immediately respond to requests for comment.

Other tech firms that have raised eight-figure sums, including SmarterHQ and MOBI Wireless Management, have signaled that they're not within striking distance of an IPO.

The benefits of being public often include prestige, access to capital markets and the ability to use stock as a currency to do deals. And public firms tend to be the some of the largest employers and spenders in a community.

But the road to get there is long and narrow.

"The cost of being public is not trivial," Ritter, of the University of Florida, said. "And small companies, a lot of them, have decided that it's not optimal."

Acquisitions aren't necessarily bad for a tech ecosystem, as they can create financial windfalls for shareholders and prompt employees to launch new companies. However, for the company itself, there's a risk that local decision-making and jobs will be shipped elsewhere, leaving behind a hollowed satellite office.

That's not always the case, as Indianapolis has seen with ExactTarget after Salesforce bought it in 2013 for $2.5 billion. Salesforce continued to invest in people and real estate here, and announced plans last spring for another 800 jobs.

But most companies are not ExactTarget.

Successful exits have spawned a bevy of startups and venture investors in central Indiana, and tech leaders are working hard to graduate these companies from "startups" to "scale-ups" and beyond.

Former Salesforce Marketing Cloud CEO Scott McCorkle is among that cohort of leaders, and he believes the future is bright for Hoosier tech IPOs.

"I think something that's a fair stake to put in the ground is, as we become successful in Indianapolis with our technology community, we should expect more IPOs."

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