Monday, November 24, 2008

Episode 5.1. More musing on Exits.

I’ve been thinking more about exits. It is in down times like these that revolutionary ideas often find traction. During flush times, people are not incentivized to try a new approach --- they just want to keep doing what is working. But when things aren’t working, those same people will be open to a new approach. There is little to lose.

Well, the exit process isn’t working right now, period. New businesses are not being taken to the public markets. One way to look at it is the stock variety you can invest in has remained fixed or shrunk over the past couple of years. When new ideas – new businesses have emerged they have either stayed private or been bought by bigger companies and absorbed.

I have the impression that the public investor has an appetite for flyers, has a desire to invest a small portion of their money in a risky new idea with huge growth potential. It may only be a small portion of their pile, but like the endowments that fund venture capital, the public investor wants to allocate a few percent of their investments to a sexy new idea. I think this interest never dies. And I think it is an itch that hasn’t been scratched recently. In the midst of the market melt down, I propose there remains a latent demand for IPOs. It may be smaller now that in 2000 (much smaller), but it’s not zero.

So here’s a wild prediction: I predict the IPO market will return in 2009. However, I predict it will come back in a new way. The old way involved investment banks running the show and underwriting the offering. Half those investment banks no longer exist or half been consumed and morphed into some new entity with an entirely different business model. I doubt that model will return soon. But there was a lot of experimentation with the Dutch Auction method during the past decade. It seemed to be ideally positioned to maximize benefit for the company and minimize benefit for the investment banks and their inside clients. It worked for Google. But there was a lot of criticism of it subsequently, I suspect driven by those investment banks who didn’t like being effectively disintermediated.

Well I wonder if this model is poised to come back strong in the coming year. Those banks are on their heels and struggling with their own problems. And there has been a subtle change in people’s impression of online finance. Witness the extraordinary success Obama had fundraising online. Half a billion dollars was raised online in this past year’s campaign. I think the public perception of the Internet as a financial conduit has matured. People seem to believe they can trust the Internet as much as the telephone or the television in the conduct of their daily lives.

So I think the idea of a Dutch Auction run on the Internet, with copious information equally available to everyone, is an idea who’s time has come. And I'm beginning to suspect that 2009 is that time, and especially ripe for this kind of revolution. I’m going to try to develop this idea further in subsequent postings.

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