(No) Exit Ahead?

A leading venture capitalist offers a tough-love survival guide: How to keep your company afloat when the IPO market has dried up. Plus, six words you should never use when raising money.

Read the Magazine Story: Dan Case’s Next Great IPO (Intellectual Public Offering)

Let’s face it: IPOs are no longer an engine for growth. They may not even be the ultimate destination for most new companies. Only 1 of 39 IPOs filed in 2001 has been completed, according to CommScan LLC; 92 have been withdrawn. And the number of IPOs in the pipeline is the lowest in more than a decade.


What’s more, IPOs just aren’t packing the punch they once did. According to VentureOne Corp., in the first quarter of 2000, 70 companies completed venture-backed IPOs to raise a total of $7.52 billion. That’s more than was raised in all of 1997, when 119 IPOs were completed. Then lunacy turned to sanity. In the first quarter of this year, a mere 5 IPOs were completed, raising a paltry $467.5 million.

Even though the IPO is nearly extinct, great ideas are still bubbling up. If you want to expand, hire new people, or get your product to market, don’t lament the loss of capital. If anything, times of constraint breed much-needed radical innovation. So argues Paul Deninger, the blunt, energetic chairman and CEO of Broadview, a private equity investor and adviser on dozens of technology mergers and acquisitions.

“We’re not advising companies for growth. We’re advising them for preservation,” he says.

Here is his somewhat contrarian prescription for how to grow slower — and smarter — when the market turns south.

To move from incremental innovation to radical innovation, give people less money and less time.

“There’s this implied sense of innovation in the phrase ‘business model.’ There’s only one business model: growth in revenue and profit. The real innovation comes in doing more with less.


“There’s been a lot of talk in the past few years about all the wonderful innovation. But when was the last major advance in user interface? When was the last killer app for the PC? The technology industry became obsessed with the stock market and focused on market capitalization instead of revenue, going public instead of developing great products.”

Most radical innovations in technology are led by small teams focused on products. Think of Xerox PARC. “It wasn’t focused on shareholder value, but on producing great products. And it came up with some of the most enduring technologies,” says Deninger.”

Stop fund-raising and start working.

Entrepreneurs who are on a yearlong fund-raising campaign, or who are thinking about how to raise the next six months of capital when they have only three months of cash in the bank, need to stop and rethink how they spend their time. Building a company doesn’t necessarily involve getting more capital. Don’t do the umpteenth road show or cold call. Avoid debt financing and the private placements being shopped around by out-of-work underwriters. “Those options don’t address the fundamental problem of how quickly you use your cash,” Deninger says.

First, break even. Let’s say it all together: break even. Whether you’ve got a product or not, break even. Resize, restructure, do whatever it takes to get to profitability.

Then, get to “fundable milestones,” such as first customers and successful beta tests. Venture capitalists or private investors may be willing to split their funding between an up-front investment and one of those milestones. “There’s still a lot of cash out there,” Deninger says, but investors are choosy about where they spend. Companies that have customers and profits will find funding fast.


Relationships still matter.

Venture capitalists will only fund the second round of their favorite companies. Customers will strategically invest in companies whose products they use. So build relationships that allow you to get cash without diluting your equity stake in the company.

Want to get your product distributed? License or codevelop your product with a big corporate partner. “These companies still need to grow and want access to new products,” he says. In turn, you can leverage their sales force and don’t have to hire more salespeople.

Need capital to finish your software development or to fund the next release? Ask customers for up-front payment or a prepaid license. If your relationship is strong, and the customer is stable, you’ll get it.

According to Deninger, “That is what companies used to do when venture capital wasn’t plentiful.”

Sidebar: Times Change, So Change Your Words

Every era creates its own vocabulary, and the IPO boom was no exception. Deninger calls for “a pox” on words like — ahem — “monetize.” Here’s his guide to what’s in and what’s out.



  • Profit and revenue
  • Customers acquire you
  • Economic model
  • Cash
  • Sales
  • Self-reliance


  • Buying market share
  • Customer acquisition
  • Business model
  • Capital
  • Marketing
  • Venture capitalists

Read the Magazine Story: Dan Case’s Next Great IPO (Intellectual Public Offering)