I was at the third annual AlwaysOn Innovator’s Conference last week at Stanford. Why anyone who has “The Farm” as an option would even consider an alternative should be the last test question for admission. It’s a stunning place.

Michael Moe [ThinkEquity Partners] | POSTED: 07.25.05 @12:36

A panel I was on Wednesday was titled, “Is the tech IPO dead?” Given the bias of the crowd and assumed affiliation of my fellow panel members, I thought there would be a lot of violent agreement about our subject.

Much to my surprise, not only were there various opinions other than mine on the state of the tech world and capital markets, but I felt like a Martian with my point of view.

First some facts. After 15 years where IPOs and Technology were linked like Elmer and glue, they have become decoupled. Year to date, only 16% of all IPOs have been technology companies versus 36% of all IPOs being technology companies from 1990 to 2004.

Second fact: The average tech IPO is much bigger in terms of float and market cap than the historic average, and the growth rates are lower. Where the typical tech IPO of the past was generally smaller than the IPOs done outside technology, the average tech IPO today is about 2.5 times greater than the non-tech IPO.

Third fact: Merger & Acquisition activity has accelerated for technology companies dramatically with tech M&A deals doubling in the first half of 2005 to $60 billion from the first half of 2004.

What’s going on? And is there some permanent secular trend that makes tech IPOs yesterday’s news?

Some more facts enhanced by a point of view.

There are a number of sectors that are part of the technology umbrella that have matured and will be more prone to consolidation than going public. Semiconductors are mature. PCs are mature. Software is maturing. Automobiles were a new technology and a growth industry 100 years ago. We haven’t seen an automobile company go public in 50 years. New definitions separating older technology and growth technology sectors are important.

Sarbanes-Oxley has created a major impediment for private companies to become public. Looking at the 10,000 public companies with a market cap below $1 billion, if you assume $1 million a year for SOX compliance, that is $10 billion a year for mainly non-productive cost. If you put a 20x p/e multiple on that $10 billion, it’s a $200 billion destruction of market value. This is crazy, but Washington doesn’t get it yet.

The all-wise, completely pure bulge bracket firms are telling IPO candidates, “Unless you have a $500 million market cap and $100 million of float, you will be an irrelevant public company.” Because there is no prominent alternative voice in the market, this chorus has remarkably brainwashed otherwise critical thinkers.

Here’s our view—the tech IPO isn’t dead but going outside conventional wisdom is.

The market is starved for growth and innovation. The “big ideas” that fueled our stock market led by technology are alive and well—we need to facilitate a bridge to help these companies get public.

The AIM Market in London—somewhere between the Vancouver Stock Exchange and NASDAQ circa 1990 is filling a void. So are SPAC’s—Special Purpose Acquisition Corporations. Undoubtedly, some enterprising companies/boards and investment banks will break through the current conundrums. To the innovators go the spoils!

Stocks continued to act well last week as earnings season kicked into full gear. The Russell 2000 continued to lead up 2.1% for the week. With 40% of the S&P reporting, a whopping 72% of companies have reported numbers that beat estimates. Looking ahead, growth is expected to accelerate from the 2nd quarter’s forecast of 10%.

We continue to be bullish on the market and small cap growth stocks specifically. Fundamentals are strong, valuations are low and there continues to be a demand imbalance for equities.