Tech companies create small value fast, but take the same time as biotech to get to IPO

By August 11, 2011Exits

The chart below shows that software and services companies take about the same amount of time to get to IPO as just about all other categories of companies that venture capitalists invest in. I found it on CNN Money.

This is a somewhat surprising finding given that internet companies often create value really fast, and thinking it through I came to the conclusion I used as the title to this post – that what internet companies are good at is creating some value really quickly, but to create the demonstrable value that underpins an IPO takes longer.  Taking two recent high profile internet IPOs as examples – LinkedIn’s IPO came 8.5 years after it was founded, and Pandora’s 11.5 years.  Facebook was founded in 2004 and will be eight years old at IPO if it goes out as expected next year (although they could have listed earlier).

These long periods for internet companies to IPO contrast with the very short period to exit for companies like YouTube (21 months from being founded to $1.7bn exit) and Skype (2.5 years), and there are numerous examples of very rapid exits for internet companies at lower values.  I can’t think of examples from other sectors where large exits have come so quickly.

The difference between internet companies and others then is that they are able to establish market leadership more quickly than companies in other sectors and hence command good M&A exits, but they are no quicker to build the revenues and profits that underpin an IPO.  In general at least.

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