Second wave start-ups selling out to competitors
By stephendavis on Oct 20, 2006
Initial Public Offerings or IPOs, whereby private companies choose to raise additional capital from new investors by issuing shares on a listed market (going public) no longer seems to be the preferred route for the recent wave of Internet and technology start-ups. Instead most start-ups have opted to sell out to established competitors either for cash or in exchange for stock options in the acquiring company.
This trend among second wave Internet companies is in contrast to the frenzied rush by dot com start-up some 6-7 years ago, when to some observers many dot coms didn't appear to have (or be concerned about) a sustainable business plan beyond the IPO. The IPO was an end in itself. Most of the talk seemed to be about exit strategies for the founders rather than creating long term profit growth for the new investors.
Recent changes in regulatory controls mainly affecting the firms that advise start-ups has probably dampened the financial industry's appetite for managing IPOs. At the same time, investor interest in new issues has not recovered from the bubble bursting in the spring of 2001.
For the directors and staff of start-ups, selling out to an established firm can have other advantages. In the case of YouTube for example, Google offers considerably more technical expertise and resource to help build the business infrastructure than would be possible from the 60 or so burned-out staff employed by the start-up. Additionally, Google lawyers can start to tackle the tricky issue of copyright and maybe reach agreements with content owners such as the music studios and media companies.