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As Dust Settles in Silicon Valley Scholars and Practitioners Ask: What's Next

March, 2003

STANFORD GRADUATE SCHOOL OF BUSINESS—The "tourists"—newly ordained venture capitalists from across the globe—"have all gone home and we can get back to business," said Michael Moritz of Sequoia Capital in the opening panel of a conference on Entrepreneurial Finance and Initial Public Offerings, co-sponsored by the Stanford Graduate School of Business and the New York Stock Exchange and held in Half Moon Bay, March 6-8, 2003.

For thought leaders gathering at the conference, "back to business" meant assessing the present state of investment in technology companies, the role of technology in IPOs, and the IPO process itself. Their aim was to discern what new practices will begin to emerge as the market recovers, and to think about how technology can be used to improve the capital formation and allocation process.

According to conference participants, the deal flow regarding technology investment in Silicon Valley is almost choked at the moment but still showing signs of life. Traditional early-stage funders—"angels"—are still reeling from the losses suffered in the boom years and their enthusiasm for risk hasn't bounced back. Entrepreneurs seem to be harder to quash, however, and many are bootstrapping their companies with the help of family and friends. But presenters expressed concern that this new generation of firms is being deprived of the management savvy that venture capitalists have to offer. While established venture funds still have the infrastructure to bring new firms to fruition, they are increasingly selective and reluctant to do so.

In explaining the genesis of the conference, Haim Mendelson, codirector of Stanford's Center for Electronic Business and Commerce, noted, "Entrepreneurship and technology have become the nation's engines of growth, and we should do better than cycle from flooding them with capital to starving them altogether. We set up this conference to better understand the economics of venture capital, private equity, and initial public offerings, and how these markets are adapting to recent changes in technology and regulation."

The conference brought together perspectives from academia, industry, and government. Jay Ritter of the University of Florida, for example, argued that issuers left large amounts of money "on the table" by offering shares at below market prices. Would an electronic auction that allocates shares to the highest bidders do a better job? Not necessarily. David Langstaff, president and CEO of Veridian, which went public on the New York Stock Exchange, argued that price is only one consideration and emphasized the importance of allocating shares to the "right" investors. He also noted that the quality of the particular analysts who follow the stock was a significant factor to be taken into account.

In a study of the European IPO market, Tim Jenkinson of the Said Business School at the University of Oxford found that underwriters tend to allocate more shares to institutions that they consider of "high quality." Ann Sherman of the University of Notre Dame showed that the traditional IPO process helps issuers reduce risk and information costs. Indeed, she found that around the world, the number of markets that use auctions to allocate shares is small and decreasing.

The conference was sponsored by the New York Stock Exchange and two research centers at the Stanford Graduate School of Business: the Center for Electronic Business and Commerce and the Center for Entrepreneurial Studies. The conference program is listed below. For more information about the program, see www.gsb.stanford.edu/cebc/.

Conference Program

Introduction: Robert L. Joss, Philip H. Knight Professor and Dean, Stanford Graduate School of Business; and Paul Bennett, Senior Vice President and Chief Economist, NYSE

Session 1: Evolution of Venture Capital and IPO Markets
Chair: Maureen O'Hara, Cornell University
Presenters:
Jay Ritter, University of Florida: The Ups and Downs of the IPO Market
Steven Kaplan, University of Chicago: The Past and the Future of Private Equity Returns
Manju Puri, Stanford Graduate School of Business: Banks and Venture Capital
Discussant: Michael Moritz, Sequoia Capital Partners

Session 2: Chief Executive Perspectives on the IPO Process
Chair: Haim Mendelson, Stanford Graduate School of Business
Presenters: Peter Thiel, former CEO, PayPal: Risky Business
David H. Langstaff, President and CEO, Veridian: Veridian's Experience

Lunch Keynote Address: Lawrence W. Sonsini, Chairman and Chief Executive Officer, Wilson Sonsini Goodrich & Rosati: Implications of Sarbanes-Oxley

Session 3: Venture Capital-What Is Next for the Industry?
Chair: Garth Saloner, Stanford Graduate School of Business
Panelists:
Michael Levinthal, The Mayfield Fund
Greg Waldorf, Charles River Ventures
William Meehan, McKinsey & Co.

Session 4: The Demand for IPOs and Managerial Responsibilities in a Public Company
Chair: Charles A. Holloway, Stanford Graduate School of Business
Panelists:
Mary E. Barth, Stanford Graduate School of Business and International Accounting Standards Board
Nancy Wojtas, Cooley Godward LLP
Mark Leslie, Managing Director, Leslie Ventures (former Chairman and CEO, Veritas; currently on the board)

Dinner Keynote Address: Dr. Lawrence E. Harris, Chief Economist, U.S. Securities and Exchange Commission

Session 5: Bookbuilding
Chair: Roberta Karmel, Brooklyn Law School
Presenters:
Ann E. Sherman, University of Notre Dame: Global Trends in IPO Methods: Auctions vs. Bookbuilding
Tim Jenkinson, Said Business School, University of Oxford: Bids and Allocations in European IPO Bookbuilding
Discussants:
William J. Wilhelm, Jr., McIntire School of Business, University of Virginia and Said Business School, Oxford University
Ekkehart Boehmer, NYSE

Session 6: Diversification and Syndication
Chair: Ronald Gilson, Stanford Law School and Columbia University School of Law
Presenters:
Charles Jones, Columbia University: The Price of Diversifiable Risk in Venture Capital and Private Equity
Paul Schultz, University of Notre Dame: The Role and Structure of IPO Underwriting Syndicate
Discussants:
Antoinette Schoar, Massachusetts Institute of Technology
Per J. Stromberg, University of Chicago

Session 7: IPO Markets and Private Equity
Chair: Bernard S. Black, Stanford Law School
Presenters: Francesca Cornelli and David Goldreich, London Business School: Pre-IPO Markets
Matthew Richardson, New York University: The Risk and Return of Private Equity
Discussants:
J. Harold Mulherin, Claremont McKenna College
Colin C. Blaydon, Dartmouth College, Tuck School of Business