By the Numbers: Venture-Backed IPOs in 2016

Richard C. Blake and Heidi E. Mayon are partners at Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. This post is based on a Gunderson Dettmer publication.

Only 42 venture-backed companies went public in the United States in 2016, including eight incorporated outside the United States, making it the most challenging year by number of IPOs and by aggregate offering amount raised since the recessionary times of 2009. The average offering amount per IPO in 2016 was only $77.3 million—the lowest average since 2003. Life sciences companies represented over a majority of the IPOs completed in 2016, many of which relied in some part on insider participation, consistent with 2015.

Venture-backed IPOs in 2017 are on pace to surpass the levels reached in 2016, both in number of IPOs and aggregate offering amount raised. In the first six months of this year, 31 venture-backed companies have gone public in the United States, including seven incorporated outside the United States. And the Snap Inc. IPO in March 2017 raised $3.4 billion—nearly $70 million more than all venture-backed IPOs in 2016 combined. In 2017, however, one venture-backed company abandoned its IPO plans on the eve of pricing to accept a lucrative buy-out offer, and several high-profile venture-backed IPOs are currently trading below their IPO price.

As the nation’s leading business law firm for entrepreneurs, emerging growth companies and venture capitalists (VCs), Gunderson Dettmer is frequently asked, “what’s market in an IPO?” As we have in the past, we analyzed the 34 venture-backed companies incorporated in the United States that were involved in IPOs on U.S. stock exchanges during 2016, reviewing their IPO prospectuses and corporate governance documents. Our report, available here, outlines what we learned, “by the numbers,” in the following key areas:

  • JOBS Act accommodations
  • directors and independence
  • board committees
  • board policies
  • executive and director compensation
  • key metrics and non-GAAP financial measures and
  • defensive measures

About the Companies and the IPOs

Of the 34 venture-backed companies we reviewed:

  • all are incorporated in Delaware
  • 9% listed on the Nasdaq Global Market, 32.4% listed on the Nasdaq Global Select Market, 11.8% on the Nasdaq Capital Market and 2.9% on the New York Stock Exchange
  • the average time from incorporation to IPO was just over eight years
  • the average time from initial registration statement submission to the SEC to pricing the IPO was nearly 8.5 months
  • 56% relied on insiders buying in the IPO
  • nearly 6% involved selling stockholders, who in those IPOs sold on average nearly 16% of the offering
  • nearly 30% included a directed share program component in the IPO.
  • only seven of the companies completed follow-on offerings in 2016

The following are some of the key findings we identified in the report.

JOBS Act Accommodations

  • Each venture-backed company took advantage of the JOBS Act accommodation to submit a registration statement confidentially, spending on average nearly 6 months in confidential registration and filing the registration statement publicly over two months before their roadshow.
  • Over 88% of venture-backed companies took advantage of the JOBS Act accommodation to provide two years of audited financial statements, an increase of over 8% from 2015.
  • Nearly all venture-backed companies provided limited executive compensation information.
  • Despite the JOBS Act accommodation, nearly all venture-backed companies choose to be subject to new public company generally accepted accounting principles (GAAP).
  • Almost one-third of venture backed companies disclosed material weakness in their internal controls.

Directors and Independence: Board Committees

  • A significant majority of venture-backed companies have substantially independent boards and board committees at the time of IPO, consistent with 2015.
  • VCs frequently serve on board committees as independent directors, often despite stock ownership in excess of 10%, consistent with 2015.

Board Policies

  • A significant majority of venture-backed companies disclosed the adoption of key board policies, including corporate governance guidelines, codes of business conduct and related party transaction policies, prior to the time of IPO, consistent with 2015.
  • In a growing trend, nearly half of venture-backed companies voluntarily disclosed board or committee oversight, or both, of management’s enterprise risk management function.

Stock Plans

  • Nearly all venture-backed companies adopted a new equity compensation plan at the time of IPO, and nearly all of such plans included an “evergreen” provision, consistent with 2015.
  • Three fourths of venture-backed companies adopted an employee stock purchase plan (ESPP) at the time of IPO, most of which included an “evergreen” provision, consistent with 2015.
  • Adopting an executive bonus plan, executive severance and change-in-control severance plans and a non-employee director compensation plan are nearly universal prior to an IPO.

Key Metrics & Non-GAAP Financial Measures

  • Consistent with 2015, the use of key metrics and non-GAAP financial measures was down slightly from previous years, driven in part by the number of life sciences IPOs that tend to have a lesser emphasis on historical financial performance.

Defensive Measures

  • No venture-backed company adopted a stockholder rights plan, or “poison pill,” in connection with its IPO, consistent with 2015.
  • Dual-class common stock structures are still relatively uncommon, with less than 18% of companies adopting.
  • Other defensive measures, such as classified boards and other protections inserted in the certificate of incorporation and bylaws, were liberally adopted, consistent with 2015.
  • Over 91% of venture-backed companies adopted an exclusive forum provision in their governing documents.
  • Despite pressure from Institutional Shareholders Services (ISS), venture-backed companies continue to adopt defensive measures in advance of their IPOs, and none in 2016 appeared to commit to seek stockholder approval for their defensive measures within three years to satisfy ISS.
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