Credit Crunch Stymies Funding for Start-Ups
By Tom Ryan
On its op-ed page, the Wall Street Journal last week questioned how the next Intel, Google or Apple will be funded given the ongoing liquidity crisis. But the retail industry faces a similar question: Who will fund the next Whole Foods, Amazon or Lululemon?
The piece by James Freeman noted that the second quarter marked the first time in 30 years that not a single company backed by venture capital went public in the U.S. Even before the credit crunch, venture-backed IPOs in 2005 and 2006 were far below the levels of the early 1990s. A recovery in IPOs in the early months of 2007 wasn’t close to the number of young companies being acquired by bigger, more established firms.
Although being acquired by a larger competitor certainly offers a funding option, Mr. Freeman wondered if the tech darlings would have prospered under different ownership. He speculates about possible fallback marriages such as Yahoo buying Google before its 2004 IPO or even IBM snapping up Intel before its 1971 IPO.
“An IPO generally means that the founders can continue to run the companies they have painstakingly built, except with greater resources,” wrote Mr. Freeman. “An acquisition generally means that the founders move on, see projects they championed get axed, and watch old colleagues get fired. How many company founders would aspire to conduct a sale of the business instead of a public offering, absent some bizarre and unnatural conditions in the market?”
While never attracting the level of capital flying to tech, retail start-ups are also likely seeing more limited funding and IPO options that had paved the way for IPOs from the likes of Best Buy, Kohl’s, Walgreens, Lowe’s, Bed Bath & Beyond and others in the past.
The problems finding funding from venture capital firms are being compounded by the reluctance of start-up companies to deal with the costs, liabilities and newer burdens of going public. “The [Sarbanes-Oxley] and governance issues are cumbersome, and it means they spend all of their time as administrators versus growing their companies,” Kate Mitchell of Scale Venture Partners told the Journal.
Also making IPOs less appealing for younger companies is the reduced coverage of small-cap companies by Wall Street due to increased regulations over investment banks.
In all, Mr. Freeman believes the challenges of funding and being public are robbing corporate America of much of its entrepreneurial drive
He concluded, “Our society should be encouraging these entrepreneurs to dream big.”
Discussion Questions: How much do you think funding for promising retail start-ups will be affected by the credit crunch? Do diminishing prospects for blockbuster retail IPOs diminish prospects around the development of blockbuster retail concepts?