Panel Participants:
Adam Miles, Jefferies Venture Services
Stephen O'Leary, Jefferies Venture Services
Sam Schwerin, Millennium Technology Ventures
This session was sponsored by Jefferies Venture Services
Q: What's your basic exit philosophy?
Paul: You have to do a lot of planning and understand that the capital raise will vary by company. Sometimes we know we want to go for an IPO, and it typically takes a few years longer to do that. It's harder than it used to be.
Stephen: Maybe we should define an “exit.” When you go public, there is not necessarily liquidity. I would argue that today, there is less liquidity than ever in going public. Going public is a financing event. Google ought to be public, and it's the right thing for them. But for mid-market and small-cap companies, it's not always the wisest thing. The market's more hostile now for that. On going public, many venture capitalists withdraw from the company.
Sam Schwerin: We plan a very detailed, specific exit that typically takes about 18 months. Only one in twenty companies we deal with goes to an IPO. It presents its own sets of problems. It extends the time to exit for many Vcs. There's a strategic side and an opportunistic side.
Q: How do you talk people out of an IPO?
Stephen: It's tough sometimes. More and more buyers are now financial, which reduces the risk of debt. Also, there's a trend toward consolidation; we are seeing groups of companies coming together in order to go public together.
Q: What are some of the forces of change today?
Sam Schwerin: No investor wants to be subjected to all kinds of regulatory burdens. Look at the disclosure of company assets. Oppenheimer and Enron seemed transparent to most people. How many mutual funds do you own that show a 99 percent loss per quarter? None. So right now, the SEC is doing over 50 investigations of companies whose assets are hidden away in things like hedge funds.
Paul: All of these IPO problems are particular to the United States. You don't find the same challenges in Japan or China, for example. But looking for exits abroad has its challenges.
Sam: The concept of exits is much more important now. We've done many things to help companies exit. They might go public, sell a portion of their business, get into mergers or reverse mergers, etc.
Stephen: Now the business model focuses typically much more on development and strategy. The whole name of the game is to position a company to be bought. You don't see a process of writing a book and going to thirty companies for starting partnerships.
Q: How did Skype get bought by eBay?
Stephen: eBay acquired Skype for $2.7 billion. Skype's founders are not allowed to enter the United States, so this deal speaks to the global democratization of business transactions. There are so many interconnective aspects of these businesses that cross national borders.
Q: Do you think the terms for funds will be higher or lower in the future?
Sam: Hedge funds, even in venture capital, are now becoming more important. The key will be, as these terms come down, how do you structure things to maximize your return?
Q: Why use reverse mergers?
Sam: They're usually failures. But you need to look for a deal that would reward you if you got non-liquid funds out of it, since reverse mergers don't offer liquidity.
Q: Are VCs scared of hedge funds?
Paul: Some actually go after them, although most are wary.
Stephen: One benefit to hedge funds is the ability to recycle capital and go after opportunities that might not otherwise be available.
Sam: As long as you have expertise, hedge funds are ideal. Venture capital was bad timing in 2000, 2001, but good timing in 2002, 2003. Folks that know how to do private equity investments will go after them.
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