More pulled flotations have wider impact

A few weeks back, my colleague, Toby Lewis in the weekly Big Deal analysis, wrote about solar company BrightSource’s pulled flotation as a "closely-watched canary in the coal mine".

He said its cancelled initial public offering was either representative of changing economic conditions, or just of BrightSource’s prospects. It appears the former is more likely to be the case, at least for US stock markets, after BrightStar, Enerkem and Luca Technologies halted their listing plans this week and Envivio floated at a lower price than it had expected and after its own postponement.

As Lewis said after BrightSource’s cancellation: "[This] marks a dramatic turnaround in sentiment from the first quarter, which was the best three month start to the year in the US since 2007 for IPOs, with 80% of the quarter’s initial public offerings producing positive returns, according to accountancy firm PricewaterhouseCoopers."

The US reported softer-than-expected economic growth figures last week, at an annualised 2.2% based on the first three months’ gross domestic product figures, following China’s lowered 8.1% annualised growth rate estimate, while concerns remain about the eurozone given Spanish government warnings of a "crisis of enormous proportions" and nearly a quarter of its workforce unemployed.

But the problems seem to be more reserved for less-tested companies trying to float in the US than for market reactions to incumbent public companies.

After nine straight quarters of growth, earnings for companies in the S&P 500 index were expected to be broadly flat for the first quarter and there was strong support from the first few results this month as big corporations have posted positive results.

And while there were 44 IPOs on US markets in the first quarter, there were 49 in China (and a further 11 Chinese companies listing in Hong Kong and New York).

The difference in sentiment reflects the outlook for a faster-growing, but smaller, Chinese economy and a slower-growing, but larger, American peer. In such conditions, it is natural to expect investors in China to buy into the promises brought to market by entrepreneurs, while those in America look to established players to continue to grind out efficiency improvements in domestic markets and faster-than-average growth by being international through their existing scale.

Europe remains unenviable in having the majority of its listed constituents born out of state-owned enterprises and often remaining sclerotic in terms of efficency and innovation and anaemic economic growth rates among its member states (if they are positive at all).

What the ramifications are for the corporate venturing units behind the companies’ pulled flotations will be interesting to see. For well-established groups, such as Intel Capital (a shareholder in Envivio), probably not much as most of its successful flotations last year were in Asia in any case. For Innovacom, which as we revelaed last week has just spun out of France Telecom and is planning a later-stage fundraising next year, having Envivio list at all will be a help.

For groups seeking some of their first ‘exits’ in an IPO, such as Waste Management and Valero (shareholders in Enerkem), the question they could face is whether the pulled IPO means they have to find more cash to support the company in lieu of public shareholders doing so and potentially maintaining top-level support for corporate venturing as a business development tool – a sometimes difficult prospect until the first successful exits are in.

But while returns will eventually need to come through for all groups to survive and thrive, the strategic pull to use corporate venturing in the innovation toolkit remains strong, especially in the area where most of the above IPOs have been pulled: clean-tech.

Waste Management estimates the $12.3bn it got for removing 112 million tonnes of rubbish to landfills last year might have been worth more than $40bn a year in energy – and so its WM Ventures unit has so far backed eight companies that gasify, ferment or digest trash, turning it into a source of heat, power, transportation fuel and specialty chemicals.

Enerkem’s slow-to-no IPO might frustrate venture capitalists but with such an economic case for shifting a business model, using corporate venturing as a tool to help speed up or make the shift would appear to be a no-brainer for Waste Management at least.