Going "Prublic": Draper's XChange

A reader sent me a link to this LA Times article about Tim Draper’s upcoming exchange for institutional investors to trade shares of private companies. This strikes me as a good idea, but perhaps a few years late given that the long-shut IPO window appears to be opening.

That said, both the current IPO bar and the costs associated with being public remain high. Friends of mine continue to say that SOX compliance costs run $2-3M/year minimum, which eats half the profits of a $50M company with 10% pre-SOX operating margins and, perhaps more importantly, easily drives the difference between profit and loss for a company hovering on the edge of profitability.

So will this work? I don’t know. Will it even happen? I don’t know. Am I glad someone’s trying? Yes. I like technological and business-model disruption and I think there’s plenty of room for both in financial services.

Is there a need for mezzanine-alternatives that enable companies to raise money and founders to get some liquidity? I think so. Back when the IPO bar was $30M, it took 4-6 years to start a software company and take it public. Today, with the bar around $50M and the practical bar closer to $100M (thanks to SOX costs), it might take 6-10 years. That creates room for a new class of financing and/or a new market for the shares of these mid-stage companies.

For a while I thought private equity might fill that niche, but it really doesn’t. They seem to care more about buying whole companies than fractions of them.

I’ve recently been wondering if foreign stock markets might be the answer. The listing requirements and associated costs are often much lower overseas. And when you look at the valuations that home-turf players sometimes get, there’s even an argument for re-headquartering overseas. For example, it seemed that every French person wanted to own a share of Business Objects and that every Norwegian wanted to own a share of Fast, just as it currently seems that every Brit wants to own a share of Autonomy.

But have no fear, much as I’d enjoy it personally, we’re not about to become Marc Logic, selling a système de gestion de base de données XML, relocate to Paris, and list on the Euronext.

Draper’s site, called XChange, is here. Ultimately, whether companies want to sell shares on it will be determined, I’d guess, by one thing: the valuations they can get relative to alternatives.

Vive le marché!

One response to “Going "Prublic": Draper's XChange

  1. tbjinvestments

    Dave:Have you looked at the TSX Venture Exchange as an alternative to listing on NYSE/NASDAQ? I'd be interested in your thoughts; we're seeing a lot more activity here on the east coast with TSX recruiting companies to head north. Seems the Canadian investment banks have also done a really good job of avoiding the problems in the US re: conflicts.

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