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Davidson: IPO's or not, TN's 'capital-starved' venture sector has fresh energy
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THE HURLY-BURLY Nashville venture scene leaves little mindshare for the long-simmering Facebook IPO, even though it is likely to become one of the four largest in U.S. history, with value projected up to $100 billion.

Nor is it likely that many Nashville heads were turned Friday, when social-reviewer YELP debuted on the NYSE at $15 and closed up 63.87% at $24.58.

True, locals might give more scrutiny to the IPO shelf-registered by Indianapolis-based ExactTarget. If it goes effective, the ripple effects of that offering could influence the e-mail campaign software and services marketplace in which Nashville-based Emma has made its mark.

And, there are special situations. For example, as reported by VNC in 2011, 2nd-generation Nashville entrepreneur Steven Collins left town after his exit from family-owned Juris (now part of LexisNexis) to become CFO for Austin e-social company Bazaarvoice, which, it turns out, was prepping for an IPO. Its IPO priced at $12 in February and closed on its first day of trading above $16, where it remains this morning. Collins also now bears the title Chief Innovation Officer, and has reaped his share of stock options, according to recent BV filings.

Generally, though, Tennesseans don't seem to be spending a lot of time in the IPO frame of mind.

Fortunately, quite apart from IPO's, there is reason for enthusiasm about improved access to capital in Tennessee, according to attorney Page Davidson, a member of Bass Berry & Sims, who recently responded to questions from VNC.

Page Davidson

Davidson, 51, is former chair of Bass Berry's corporate and securities practice area and is a member of the firm's executive committee. He provides legal counsel related to mergers and acquisitions, capital formation (registered and unregistered equity and debt offerings), mezzanine financings, shareholder activism and corporate governance. He earned his J.D. at Duke University in 1985, and undergraduate degree at Vanderbilt University, in 1982.

Davidson explained that recent developments in Tennessee have reinforced his belief that the venture-financing system - and the role of Venture Capital, in particular - is not "broken."

He sees fresh evidence of this in the wake of the state's 2009 creation of the TNInvestco program, which allowed qualified TNInvestco funds to generate capital through the sale of state tax credits to insurance companies.

Davidson observed that the TNInvestco program not only showed how "starved for capital" Tennessee's venture sector truly was; but, also seems to have generated "a renewed sense of energy" among the state's venture-capital community, creating "a new group of investors who weren't traditional VC's," but who are now investing in innovative startups and early-stage companies.

For some folks, an IPO remains attractive, of course. As recently reported by VentureTennessee, Memphis-based Green Ballast has filed for a modest $6.1MM raise (and is still awaiting approval of the trading symbol it needs to begin trading). Update: SEC revoked Green Ballast registration, March 2, 2021.-Ed.

VNC asked Davidson for comments on the pro's and con's of IPOs. First, it should be noted that Davidson, whose firm deals with all manner of equity types and modes of finance, said flatly that if he were to rank-order all capitalization and financing strategies, "I would rank going public as relatively low [on the scale], unless there is a specific identified [liquidity or financing] need to do so."

In approaching the issue, it's important to consider business scale, at the outset. Companies that are not likely to have a market capitalization in excess of $500 million will have a tough time justifying being public "due to the cost and management diversion," said Davidson. Also, "it's important to be big enough" to attract institutional investors and a liquid trading market, he added.

In addition, said Davidson, "There's plenty of capital out there for private companies" via private-equity investors and others, and corporate debt is, once again, in adequate supply.

Owners are also well-advised to consider how continual pressure to meet the short-term expectations of the holders of its public stock "may adversely affect their ability to execute on a long-term strategy," Davidson said.

Directors and management of public companies are reluctant to "lever-up" the companies they lead by employing debt-financing of growth; however, that sort of leverage is what often allows more highly leveraged companies controlled by private equity to achieve more growth, earnings and value. At the same time, every company is comfortable with different levels of debt, Davidson noted.

The path toward an initial public offering can seem daunting, but IPO's can make good sense, Davidson noted.

Launching an IPO and operating as a public company is expensive, he quickly acknowledged. The expense of preparing for registering securities with the Securities and Exchange Commission is a real "incremental load," said Davidson. Compliance with regulations -- some helpful, some less so -- under which public companies operate can be extremely time-consuming, resulting in more payroll and supervisory expense, he noted.

The need to focus some of the Board's management's attention away from business strategy and operations, and toward regulatory and shareholder affairs is seen as a major cost, as well, Davidson noted. In fact, companies made suddenly more visible to regulators are likely to receive somewhat more scrutiny from government agencies than a similar privately held business would receive, he said.

When the logic is strong, the benefits of being a listed company are potentially numerous, said Davidson as he set forth the pro's and con's.

Going public can afford a company improved liquidity and access to capital, and can provide partial liquidity for private-company owners, without their having to sell the whole business, and it allows more investors to own shares. That said, Davidson cautioned that this argument is sometimes "overplayed," given that creditworthy firms can now generally secure capital and-or debt-financings at lower cost.

Offering shares publicly also means the company can create "liquid equity incentives" for employees, and shares represent a form of near-currency that can be used in acquisitions, Davidson noted.

Prestige should not be overlooked: Particularly if your firm operates cross-borders, the prestige of being a listed company can be quite real. Abroad or in the U.S., there's no doubt that public companies are perceived by many as having achieved a certain success, Davidson said.

The world's appetite for IPO's was hearty in 2011, when IPO's valued at more than $36 Billion were executed, according to Renaissance Capital; and, SeekingAlpha reported in January that the 2012 IPO backlog of 200 is the largest cohort waiting in-the-wings since 2000. A December blogpost from The Wall Street Journal quoted New Atlantic Ventures Managing Partner John Backus saying, "More VC-backed companies will go public in 2012 than any year since 1999. All good companies. Six months later they will all trade down."

In the past 14 months, according to a recent summary by The Associated Press, other Tech IPO's have included LinkedIn, Pandora Media, Zillow, Groupon, Angie's List, Jive Software, Demand Media, Zipcar and Zynga. Some of those, the AP noted in a separate story, are now trading well below their debut pricing.

Not one of those big deals is based here, where Tennesseans go for long stretches with no opportunities to watch the emergence of homegrown IPO's.

Other than HCA's repeat IPO performances (it was the largest U.S. IPO in 2011), Nashville and Tennessee have had few new issues to watch, in recent years. Nashville's Cumberland Pharmaceuticals IPO'd at $17 in August 2009 and closed Friday at $7.84. In May 2006, Franklin-based Biomimetic Therapeutics' IPO priced at $8 per share; the stock closed Friday at $2.08.

Companies don't necessarily remain public: Nashville's Central Parking IPO'd in 1998, sold for $900MM to private equity in 2007; and, it is now on the verge of selling to Chicago-based Standard Parking for $350MM. VNC

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Tags: Bass Berry & Sims, Biomimetic Therapeutics, commercial lending, Cumberland Pharmaceuticals, ExactTarget, Facebook, finance, HCA, initial public offering, international business, IPO, John Backus, Juris, New Atlantic Ventures, Page Davidson, regulation, SEC, Standard Parking, Steven Collins, venture capital, YELP

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