Benjamin Kuo’s Blog

There’s been a lot of hand wringing over the dearth of technology IPOs lately, which got me to thinking about two broad categories of companies I see here in Southern California: companies that are built to be sold, and companies that are built to grow. It seem to me that one hidden strength we have here is that there are a number of companies (usually quiet) who are built to grow, rather than being solely reliant on the public markets or the typical buyers to sustain the company.

Companies that are built to sell, are designed — usually, from day one — to fill some technology or market niche and look attractive as an acquisition candidate. Usually, when you talk to their founder, CEO, or other executives, the entire raison-d’etre for the firm is to build it fast, and sell it for a quick exit.

Companies that are built to grow, usually are run by executives who think that they’ve got such a great idea that they have to just grow the company as far and as fast as they can. They are not specifically looking for an acquisition, aren’t specifically looking for an exit, and are just happy with market share and growth in revenues. It’s not that they don’t get acquired–usually, the very good ones do for a very good price–but they aren’t specifically looking for a sale.

Usually, companies that are built to sell are venture funded from day one — backed by VC funds hoping they will get a quick exit from a Google/Yahoo/FIM/etc. buying the firm. It’s a legitimate strategy, one which has returned well for investors many times in the past. However, it’s fraught with danger — particularly when there are a small number of potential acquirers and lots of competition, and when IPO markets are in the state they are now. You’re gambling that you are the one company out of 10 competitors which has something so compelling someone is willing to pay a premium for. this is the prototypical, early stage VC-backed company — lots of risk, lots of potential reward, swing for the fences or go down in flames.

Conversely, companies that are built to grow are usually bootstrapped, though not always, though they very often take significant venture funding later in their life cycle to accelerate their growth. These companies aren’t chasing the latest fashionable sector, but often are targeting their efforts on the most profitable or fastest growing sectors of the market. They tend to be quieter about what they are doing, and often only show up on the radar when they start showing up on the “fastest growing company” lists in revenue.

It’s an interesting contrast in styles; on one hand, companies built to sell often make the headlines, and encourage lots more startup activity here (founders/employees cash out quickly and go on to found their second/third/fourth startup). On the other hand, companies built to grow usually don’t get a lot of attention, but end up creating huge, profitable businesses employing lots of technology workers in the area. Some companies along those lines that come to mind here are Oversee.net, Specific Media, and The Search Agency, among recent firms — and historically, companies like Kingston Technology and Linksys.

Both kinds of companies have their place, but in this no-IPO, depressed M&A market, it’s to our benefit to have those “built to grow” companies who aren’t dependent on continued venture funding to pay the payroll, and grow to become major businesses without depending on someone funding their deficit spending. Yes, they might (and often) take venture capital to accelerate market growth, but they’ve got fundamentally sound businesses and aren’t dependent on the fickle M&A market to survive– a key to growth in this kind of market environment

I’ve been rather amused to read a number of job posts today from startup companies that describe themselves as “pre-IPO” in trying to attract employees. Given the news today that there were no IPOs in Q2 of this year, it appears that in reality most of the technology startup world is in a permanent “pre-IPO” condition.

Once upon a time, in the world of technology startups, “pre-IPO” meant that your company was planning to go IPO–soon–as your exit strategy. For awhile–during the bubble–that meant you were ready to file, most likely to have an IPO in the next 6-9 months, and basically you were luring the idea of pre-IPO stock to try to grab those employees.

Now, with such a dismal exit environment, I suspect you’re going to have to wait more than a few months (years?) for the “Pre-IPO” company to actually turn into an IPO, if it ever does.

EETimes is reporting today that Westlake Village-based Inphi is eyeing both acquisitions, and an IPO in 2009 on the Nasdaq. Inphi develops high speed semiconductors for the communications market.  Inphi is venture backed by Cadence Design Systems, Dali-Hook Partners, Flextronics, Mayfield, Tallwood Venture Capital, and Walden International.