The Real Reason IPOs And Mergers Are Down

I don't want to over simplify this, but it really is instructive to look at the big picture sometimes, and so I will.

The real problem with the tech market, and dare I say the overall market, is the quest for the gimmick. The quest for the quick flip. The serendipitous, disproportionate money maker. In the last 15 years the market has *fled* from the fundamentals, leading to a psychology out of step with the concept of creating real long term value.

Lets take a look at some of the bigger economic events in the last 10 years.

Real Estate: In America, the real estate market has tanked because it far outpaced any real underlying increases in property value. It was propped up by cheap loans for people that couldn't really afford them -- particularly after an ARM rate adjustment -- and a sense that prices, totally unrelated to the fundamentals, would keep going up. In short buy a house and make money for nothing.

Energy: The big story here -- we could have been doing stuff to use far, far less fossil fuel. We, and particularly the auto makers didn't because it was not immediately urgent. Gas prices were OK and people bought the old cars. Why bother doing anything better. It will not improve next quarters earnings. That short term corporate and Wall Street focus is a killer. And while the Japanese car companies have focused on the real and obvious fundamentals of the market, the American car companies are all heading towards bankruptcy.

Bubble 1.0: Companies went public by selling ads to other companies that were selling ads back to them. Can you say shell game? There weren't enough brick and mortar dollars in the eco-system so when people began to realize that these ads didn't perhaps work as well as imagined, the whole thing fell apart. Again with the money for nothing theme.

Bubble 2.0: Amazingly, bubble 2.0 is a redux of bubble 1.0 but without the public companies, so only the VCs will be hurt. As with Bubble 1.0, no real revenue -- companies like Facebook have almost no monetization capacity relative to the size of their audience. Web 2.0 has not been able to capture enough viewer attention to make ads truly effective outside of search. And selling services for hard dollars has become much more difficult, and in some quarters down right gauche. And so the public market wised up. And acquirers are much less interested in M&A transactions that are not accretive to earnings (i.e. who wants to buy companies that are not making money... we've got plenty of unmonetizable eyeballs without your help).

The point in all of this is that we have been trained to believe that there *is* a free lunch. We have learned the false lesson that we can, or should be able to make money without making any money. We have abandoned the concept of fundamentals. And so, the tech world is frustrated that all the VC turds that used to be flippable can no longer be sold. But as with the larger economy, this is just the chickens coming home to roost.

My view on this is relatively simple. You must make money if you want people to buy you.

The money you make must not be a gimmick. It must be money you are making because you are adding real long term value to customers. If you make a lot of money, you can sell your company to a larger company, or you can take it public. The concept of IPO is not dead forever. But the idea of IPOing crap probably is.

Of course if you do actually make a lot of money, the urgency to sell or IPO your company decreases, which will of course make you more appealing when you do actually sell out or IPO. Google only IPOed because they had too many shareholders and were therefore required by law to do so begin reporting as a public company. I am not saying any of us is likely to achieve the same result as Google, but the dynamic of building a company that doesn't need to sell is the same.

The point is that we should all be less focused on exits and more focused on excellence. If that means the VC industry needs to restructure to accommodate that new reality then so be it.