New study says probability of IPO exit is 20% to 25%

BVWireIssue #63-1
BVWireIssue #63-1
December 5, 2007

Remember the days when the SEC would accept simple rules of thumb?  Since the burst of the venture capital bubble, it’s become rare for a company to get funding in the unproven "concept" or "business plan" stage, said presenters Neil Beaton and Robert Duffy in their session on technology risk cycles.  "There has to be product feasibility."   To increase accuracy and acceptance, Beaton suggested expanding the definition of tech company development from the traditional three stages (Early, Expansion, and Mature) to five: Very Early, Early, Break-Even, Expansion, and Mature.

The Grant Thornton team also recently discovered a new academic study: Private Equity Discount: An Empirical Examination of the Exit of Venture Backed Companies (Journal of Investment Management, 2003), available here.  The authors track over 52,000 financing rounds for 23,208 unique firms 1980-2000, concluding that the probability of an IPO exit is roughly 20% to 25%.  Beaton and Duffy are currently working with the authors to update the data, possibly to include additional metrics and stages of firm development.  From their initial analysis, “there is more risk than meets the eye, ” Beaton said.   Early stage companies don’t fit the “standard” valuation mode and innovative thinking is required to get “outside the box.”   Most importantly, “don’t attempt this at home.”  BVWire will continue to follow the efforts by Beaton and Duffy to expand and apply this exciting new research. 

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