Yelp this: IPO market is killing it

The death of small company IPOs has been greatly exaggerated. 

Last week I took a call from someone affiliated with the White House National Economic Council, who wanted to discuss capital-formation issues facing today's small businesses. Among the topics of conversation was a report submitted to the Treasury Department by a self-organized IPO Task Force whose members included venture capitalists, investment bankers and academics (full report posted below).

I was glad he called, and hope that he took my basic message to heart: Find something else to work on. Small company IPOs are just fine.

The last time I wrote about this subject was in March, in response to an alarmist Wall Street Journal editorial about how venture-backed IPOs were becoming an endangered species. In that post, I noted how 2010 had been a banner year for IPOs. Not only had more companies gone public and raised more money than in 2008 and 2009 combined, but VC-backed companies actually raised more via IPOs than they had in the dotcom heyday of 1999. At the time, the jury was still out on 2011. But not anymore.

So far this year, 45 venture-backed companies have raised around $8.26 billion through IPOs on U.S. exchanges. The dollar total already is better than last year's number ($7.6b), thanks to recent blockbusters like Groupon (GRPN) and more modest offerings like today's $90 million offering for data security company Imperva (IMPV).

The total number of 2011 offerings is still lagging -- 45 compared to last year's 75 -- but a whopping 9 VC-backed companies are scheduled to price before the end of next week. In fact, next week's coverall IPO calendar (including both VC-backed and non-VC-backed offerings) is the busiest since November 2007, according to Renaissance Capital.

And it doesn't end there. Social gaming giant Zynga is expected to price its $1 billion offering just after Thanksgiving, while several other VC-backed companies are eyeing December offerings. Plus yesterday's news that Yelp has picked bankers for a $1 billion-$2 billion offering, which likely would take place early next year.

What we're seeing in terms of IPO ebbs and flows is about momentum, not structure.

When the public markets are hot, so are IPOs. When a respected entrepreneur like Reid Hoffman of LinkedIn (LNKD) becomes a billionaire via IPO, other entrepreneurs begin thinking that being a public company CEO might not be such a bad thing.

When all hell breaks loose, like this past August, then the pipeline gets clogged. Regulations like Sarbanes-Oxley or perceived institutional aversion to new issuers has nothing to do with it. Nor does issuer profitability, as evidenced by both Groupon and Imperva.

Look, there is no doubt that IPOs can be hard. But guess what: They're supposed to be hard.

We've had IPO environments where all you need to price is a logo, a domain URL and a dream. That didn't work out too well. I'm not saying all of today's issuers are future blue-chippers, but a successful IPO should signal to retail investors that experienced institutions have taken a hard look at an issuer and deemed it worthy of consideration.

The IPO Task Force's heart is in the right place, since it wants to increase capital formation and jobs. But it's trying to solve a problem that doesn't really exist. I hope that the White House National Economic Council has analyzed the below proposals, talked to lots of folks besides me and moved on to more pressing matters.

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