NYSE Euronext’s Scott Cutler Talks IPOs and New York’s Need for Big Exits
The select few startups that brave the leap to public markets have an opportunity to provide their early backers with healthy returns, but also come under deeper scrutiny.
Scott Cutler, executive vice president with NYSE Euronext and head of global listings, let Xconomy into his office this week to chat about the IPO market’s potential in 2013—and the need for promising companies to find ways to make money. “At some point the public markets demand a model that is going to be able to scale profitably,” he says. “Groupon is probably the best example of a company that has had massive scale, but they haven’t really figured out a business model.”
NYSE Euronext operates financial markets in the United States and Europe, including the New York Stock Exchange. Cutler is responsible for managing relationships with companies in North and Latin America, as well as with the investment banking, venture capital, and private equity communities. He says the technology sector has become more of a focus for the exchange in 2012. “Of the top 20 tech IPOs, we had 16 of them,” he says, in terms of market cap.
Residential real estate website Trulia (NYSE: TRLA), local directory platform Yelp (NYSE: YELP), and stock photo service Shutterstock (NYSE: SSTK) were among the tech IPOs on the New York Stock Exchange last year. Cutler believes companies that want to go public, though, must be ready to answer tough questions: “Is my business model mature enough to sustain the scrutiny of the public markets? It’s a high bar.”
He expects to see deals in the public markets this year particularly for companies in enterprise technology such as network infrastructure, applications, big data, and cloud services. “Last year, you had enterprise represented, but the biggest headlines were in the consumer-oriented tech deals, the Groupons, the Zyngas, and Facebook,” he says.
The inordinate buzz that surrounded last May’s IPO for Facebook (NASDAQ: FB) told only part of the tale, Cutler says, about the deals made in 2012. “While it was a big capital raise for Facebook, it was still just one transaction of hundreds that came to the market,” he says. “Absent the Facebook deal you had a fairly robust, mainline IPO market, and that’s what I expect this year to look like.”
Healthy exits via going public, Cutler says, could also help cement the local innovation community. “The New York tech scene needs some champions,” he says. “We need a few very good IPO exits and IPO champions.” Though funding activity remains vibrant in the city, he sees the need for standout companies to wave the flag for New York. “The thing about Boston, some places in Austin, and of course [Silicon] Valley is that lifecycle of investment, exits, and then entrepreneurs that come out of those exits,” he says. “It’s a flywheel that once it goes, it can be really productive.”
While many New York companies have been in the investment and growth stages, few have delivered the big exits Cutler says the city’s innovation community needs. “DoubleClick is probably our last really great example coming out of New York, but things looks pretty good,” he says. “We see a lot more entrepreneurship, a lot more venture capital looking at the New York scene.” (Google (NASDAQ: GOOG) acquired Internet ad tech company DoubleClick in 2008 for some $3.1 billion.)
So far the overall activity on the public market looks promising, according to Cutler. The positive flow of money, in the first few of months of 2013, contrasts with money exiting the market in prior periods. There have been concentrations of deals in recent months, he says, in growth-oriented consumer technology and technology-enabled financial services.
Cutler also says a number of growing companies in enterprise technology have broken through the $100 million and $200 million revenue threshold. “Companies that meet that profile typically are very healthy over the next 18 to 24 months,” he says. “These are companies that have found their foundations outside of the financial crisis.”
That might be reason to cheer the innovation scene, but companies that want to play in the public markets must make money while developing and expanding their technology. Groupon’s recent challenges, Cutler says, demonstrate why it is crucial for companies, particular with consumer-facing operations, to find ways to generate profit. “They’ve unfortunately been in the public markets while trying to figure out the ideal model for the company,” he says. “It could still be a very successful platform, but it’s been a painful year for them in the public markets.”
Other companies, he says, with massive consumer platforms and applications must also answer questions about what their revenue models will look like. Companies that are pre-revenue might look for exits through merger and acquisition deals, he says, because the public markets require companies—regardless of their “great ideas”—to make money on a certain scale. “Instagram was years and years away from an IPO, at least until they would have figured out a monetization model,” Cutler says.
There is an ongoing debate in technology, he says, about whether businesses should initially grow for scale or for profit, and at what juncture those objectives change. “A lot of people believe in [creating] technology that is first to market, first to significant scale, and then will figure out monetization later,” Cutler says. “We have public companies like that; Amazon would be a great example.” He says Amazon (NASDAQ: AMZN) has massive scale with razor-thin margins, but it is going after a big market with an infrastructure that few can compete with at that level.
As technology companies weigh their prospects of going public in 2013, Cutler foresees the U.S building on momentum from last year and reasserting its claim as the place of prominence for raising capital. “This will be the primary destination for IPOs,” he says. “It’s a deep pool of liquidity with a lot of investors and money sitting on the sidelines, and the performance of the market has been pretty strong.”