End of the IPO? Tim Draper thinks so

IPOs are so last season — at least if you ask hotshot Silicon Valley investor Tim Draper.

It’s a belief reflected in the $190 million fund the veteran venture capitalist announced Monday. Unlike most VCs, who chase IPOs in order to cash out on their investments, Draper says his fund will have a different focus. He won’t pressure his portfolio companies to go public. Ever.

“Going public is just getting to be untenable for companies,” he said in an interview, “and it’s not good for companies.”

Draper’s new fund, launched under Draper Associates, is the first he’s opened up to outside investors. Draper, founder of San Mateo-based entrepreneur training center Draper University, plans to invest in early-stage companies all over the world. He says he’s especially interested in financial technology, medical innovation, and technology that improve the efficiency of government services. Startups the new fund has invested in to date include medical company Verge Genomics, Bulgarian self-driving car company AdasWorks, and smart dumpster company Compology.

Now that they’re backed by Draper, don’t expect any of those startups to rush to go public.

After a typical company prices an IPO and opens its books up for public scrutiny, it generally has to waste around $5 million a year pacifying regulators and defending class action lawsuits, Draper said. It’s no longer the best choice for companies with a market capitalization of less than $10 billion.

Pair those costs with the current dismal IPO market, and Draper may be on to something. By the end of the first quarter of this year, only eight companies had priced IPOs, according to Renaissance Capital — a low not seen since the financial crisis of 2008. All of the IPOs were from healthcare companies, and only one was based in Silicon Valley. Volatile market conditions and shrinking private company valuations seem to be scaring Bay Area tech companies away from the public sector.

So if no one is going public, investors need another way to cash in on their investments. Draper intends to focus his fund on helping investors get returns on their private shares, including by trading those shares on private markets.

“You could have $10 million in Uber,” Draper said, “and I could have a $10 million house, and neither of us could eat, because there’s no liquidity between the two.”

Most funding contracts drawn up by VCs include incentives for a company to go public, and make it difficult for investors to trade their shares until then. By investing in companies early, Draper hopes to write provisions into those contracts that will make it easier to trade private shares.

“Some sort of liquidity is going to be happening in the private markets,” he said, “because there’s just too big a lack of liquidity.”

Photo: Tim Draper. (Draper Associates) 

 

 

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