The IPO bogeyman is dead

Feb 12, 2014

FORTUNE -- Who says Congress can't get anything done? After all, it recently repealed Sarbanes-Oxley, the landmark 2002 investor protection law that was passed in the wake of accounting scandals like Enron.

I can't actually find any mention of this happening, but it must have. Because for the past decade, venture capitalists have been blaming Sarbanes-Oxley for their inability to bring more portfolio companies public. But right now we're in the midst of a VC-backed IPO renaissance. Not only for big Internet companies, but also for small biotech and enterprise software companies for whom the extra few million dollars of compliance costs were supposed to be insurmountable. For example, more VC-backed IPOs have priced so far this month than there have been weekdays (9 vs. 8). So, ipso facto, Sarbanes-Oxley must be toast.

Or maybe, just maybe, the venture capitalists were wrong all along. Yeah, that makes more sense than the whole "Congressional action" thing.

The reality is that Sarbanes-Oxley is, and always was, a hindrance only to the weakest IPO candidates. If $2 million or $3 million of annual auditing bills are the deciding factor for an IPO, then perhaps you really aren't a strong enough company to be going public in the first place.

So what is actually driving the recent IPO boom? Here are two major contributors:

1. Bull market: There is no better time to go public then when the broader markets seem to be lifting all boats, and we've been in one of those environments since the beginning of 2013. Yes, the markets climbed in 2012 but it was last year when they went into hyper-drive. Just look at the below Nasdaq chart:

Source: CNNMoney

Gaining confidence in the public markets is a gradual process, both for entrepreneurs and for investors. So VC-backed IPO volume was pretty flat in both 2011 and 2012 -- 51 and 49 issuers, respectively -- before climbing up to 81 last year (the highest number since 2007 -- which also was a great year for public equities). And, judging by recent pricing and filing volume, 2013 is on track to nearly double that figure (yes, I know it's still very early).

There may be some VCs who point out that 2013 was the first full year in which issuers could benefit from JOBS Act provisions that, yes, included the delay of certain Sarbanes-Oxley requirements. But that wouldn't explain away why there also was a significant increase in IPOs for large companies ($1b+ in revenue) that didn't fall under JOBS Act provisions. In short, companies go public when public investors are in a demonstrable buying mood (and paying higher multiples than are strategic acquirers). Even if it's marginally more expensive than it would have been in 1995 or 2001.

2. Backlog. The capital markets were effectively closed in 2008 and 2009, thus creating a massive backlog of VC-backed IPO candidates. At the same time, a new meme started seeping into Silicon Valley about how being a public company was no longer desirable. Why be accountable to a large number of noisy shareholders -- and their quasi-representative banking analysts -- when you can just sell the company and start another one? Why suffer through making disclosures you don't want to make, or risk being fired because you didn't kiss enough hedge fund ass?

That sentiment began shifting when LinkedIn (lnkd) went public in May 2011 (hey, being a billionaire like Reid Hoffman seems cool), and the subsequent survival of Facebook's (fb) Mark Zuckerberg as a public company CEO. Not surprisingly, most popular young companies now talk about future IPOs. But it takes time to work through the backlog, particularly given that VCs never really slowed down their investment pace (even the slowest year, 2009, saw more than 3,000 companies receive VC funding).

What I really wonder about is what happens when the public equity markets retreat, particularly if it happens after the backlog has been cleared out. You know, when only the best companies are able to go public. Do venture capitalists resort to blaming Sarbanes-Oxley? Or has this recent boom taught them their lesson about that?

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