What Ever Happened To Michigan High Tech IPOs?
Inside the rather stuffy conference rooms at the Marriott Eagle Crest hotel in Ypsilanti, MI, entrepreneur after entrepreneur took to the microphone in 15 minute increments, hoping to win over at least one potential investor.
The technologies and strategies they offered varied but their business plans ended the same way: an acquisition by a large company within five to ten years.
The annual Michigan Growth Capital Symposium is the state’s premiere investor event and a good way for a journalist to unscientifically measure the mood of entrepreneurs, angels, and venture capitalists. And what struck me the most about the two-day conference was what I didn’t hear: IPO.
Not so long ago, the initial public offering was considered one of, if not the pinnacle of achievement in American capitalism. IPOs made people rich and companies proud. What entrepreneur didn’t picture himself/herself ringing that hallowed bell at the New York Stock Exchange?
IPOs, however, are largely absent in Michigan. Oh sure, there’s General Motors $26 billion offering. And investors expect Chrysler and auto parts supplier Delphi to follow suit. But those are large established companies that were previously public.
No, I’m talking about high tech startups, companies that make medical devices, software, drugs, solar panels. As far as I can tell, the last relatively young company to seek a major IPO was Affinia Group Holdings in Ann Arbor, MI. Founded in 2004, the aftermarket auto supplier said last summer it wanted to raise up to $230 million, but it has yet to go public.
Yes, there are macro-economic factors that discourage IPOs today. Weak investor demand, Sarbanes-Oxley compliance, lawsuits, high regulatory hurdles for medical devices and drugs at the Food and Drug Administration. The list goes on.
“The bar has been raised significantly,” says Jim Adox, managing director of Venture Investors in Ann Arbor. “You have to have next year’s revenues and profits already in the bank.”
Also, “IPOs are messy,” he continues. “Founders are locked up. And every company faces a shareholder lawsuit when the stock goes down.”
And with potential acquirers sitting on tons of cash, selling your startup makes perfect sense. After all, the state has seen some nice exits in recent years, including Accuri Cytometers, HandyLabs, HealthMedia, and Arbor Networks.
But I suspect culture may have something to do it.
Michigan has produced its fair share of entrepreneurs whose startups went or probably will go public-Larry Page at Google, Eric Lefkofsky at Groupon.
But those companies aren’t based in Michigan. Unlike Silicon Valley and Boston, entrepreneurs in Michigan, and the Midwest in general, are not big risk takers—and other than launching a startup, there’s no bigger risk than taking it public. An IPO also implies a long term commitment to the state where you’re headquartered.
“If you go public, you better think of Michigan as a really good place to run your company,” says David Brophy, the founder of MGCS, who teaches venture capital and private equity at the University of Michigan’s Ross School of Business. “Can I run the 10,000 miles or should I just hand it off to Johnson & Johnson?”
Dug Song, a prominent tech entrepreneur who co-founded Arbor Networks, says entrepreneurship doesn’t come naturally to Michiganders because their first instinct is to work for big companies. By that logic, it’s natural to assume local entrepreneurs would prefer to eventually sell their technology to those companies than go it alone.
“There’s a difference between building a product and building a company,” Song says.
The IPO market, like the economy in general, is cyclical. And there are signs that it’s coming back to life. The IPO pipeline, which slowed to a trickle in 2008 (when just six companies went public nationwide), rebounded significantly during the last three months of 2010, as 57 companies went public and 56 others registered for IPOs, according to Ernst & Young.
The professional networking site LinkedIn recently filed plans to raise as much as $275 million and there’s rampant speculation about eventual public offerings by Facebook, Twitter, and Groupon.
So the question is, when the IPO recaptures its former mojo, will Michigan startups jump on board?
I doubt it, though a bull market can sometimes do funny things to otherwise conservative people. And there are some good local candidates for an eventual IPO-one investor told me he could see Esperion Therapeutics or Lycera take the plunge.
For now at least, Michigan startups seem content to pass the baton to someone else. And that’s not necessarily a bad thing, as entrepreneurs can use their new riches from an acquisition to launch other startups. And it’s just as easy for outsiders to invest in Michigan and create jobs as for homegrown businesses that grew organically.
“Michigan has done reasonably well attracting companies, based on economic incentives the state is willing to provide,” says Jon Lauckner, president of GM Ventures.
But I’d argue IPO is more than just money or jobs. A state whose homegrown companies command the attention of Wall Street will reap benefits (talent, capital, publicity) long after an entrepreneur sells his dream to the highest bidder.