Veteran investor David Blumberg, Founder and Managing Partner of Blumberg Capital, has seen over 25 years of exits and acquisitions. Blumberg’s early-stage venture capital firm just had a win in the IPO of Nutanix, a cloud-based data center technology company that combines computing, storage and networking. Nutanix enables companies — Best Buy, eBay, Honda and Toyota among them — to utilize “private clouds,” keeping chosen data in-house and sourcing other pieces to the cloud.
Blumberg was kind enough to speak to me about the trends surrounding IPOs and acquisitions, and what he’s seen change in the years that he has had his finger on the investing pulse.
You recently had a successful exit with Nutanix reaching IPO. Congratulations are in order. But what happens to the other 90%?
Thank you. Well, what happens to the 90% has changed over time. A little bit of history first. In the old days when I was just getting into the industry, it was much easier, faster and cheaper to go public. It was not such an awesome endeavor, it was much lower cost, and people could go public at a much lower revenue level. When I was at T. Rowe Price in the ’80s as a buy-side analyst, many companies with modest revenues went public and they benefitted from good coverage by the securities analyst community. The public markets offered a low cost source of stable equity capital for growth. All that changed after a number of regulatory and structural changes, including Sarbanes-Oxley, raised the costs of an IPO and decimated the Wall Street analyst community. The exchange of securities research for trading commissions, known as “soft dollars” became more difficult. Sarbanes Oxley regulations dramatically increased the burden and cost of accounting, legal reviews, all of that. Then came the tort lawsuits against public companies after share prices fell from their opening. Whether or not there was misdoing, they still were sued, and a lot of the managers and directors became fearful of such potential civil and criminal liabilities.
There was a whole group of people — Mark Zuckerberg and some other great successes are in that category — started to say, "Wait a minute. What’s the benefit of going public so early? If we can raise money in the private markets, let’s just keep growing and growing and defer that decision." In the 1960’s through ‘80s by comparison, companies went public earlier which benefitted public shareholders and the mutual funds throughout the growth cycles and those stakeholders enjoyed a huge, long upturn. It was called “Growth Stock Investing.” At T. Rowe Price, we were particularly known for it. We had bought and held Xerox for years in its heyday, and IBM in its glory days. Now that’s flipped, and the benefits are being enjoyed by the entrepreneurs, early employees of the fast growing companies, and the VCs because we’re holding onto the equity during this incredible growth spurt and then selling it into the public market.
Now, Nutanix happily seems to be enjoying the best of both worlds. They seem to be on a tear, and although I can’t predict the future, I feel like they’re in the right vein of history, riding a trend.
What do you mean by those glory days of going public flipped?
When I said it flipped, I meant that in recent years, more than 90% of companies with positive exits are acquired, and only a very small percent go public. Since most VC backed companies are acquired, the question becomes: do they get acquired for a great multiple and provide great returns for investors? Or are they acquired merely for return of capital? That may sound okay if you’re just an average retail investor, but for a VC that’s disastrous. Venture Capital is a very expensive asset class. It is expensive because it’s very hands-on and time-consuming, so it doesn’t scale very well. We cannot take $200 billion like Vanguard and put it in ETFs using automated trading and have everything be efficient. Our asset class requires people meeting people, going to conferences, serving on Boards of Directors, taking a lot of equity risk, and building a portfolio over time. That’s expensive.