Why a Skype IPO Is a Really Bad Idea

Waking up this morning to the news that eBay plans to spin out Skype in an IPO next year, I had the same reaction as I did while watching the scene in “The Ring,” when Naomi Watts’ son is about to watch the fatal video: “Nooooo! Don’t do it!”

There are plenty of reasons to be skeptical of this deal, including the fact that the IPO market is essentially closed. Someone needs to tell eBay CEO John Donohoe that it’s not 1999, or even 2006. There is no way the public markets are going to throw money at a business that, while it had $550 million in revenue last year, only generates a little more than a dollar per subscriber.

Analyzing the move yesterday, Guardian tech correspondent Bobbie Johnson stated that Donohoe’s Hail Mary “shows a level of Machiavellian deviousness on the part of both Skype's founders, and now eBay itself.”

As noted earlier this week, Skype founders Niklas Zennstrom and Janus Friis have reportedly been in talks to raise private equity funding to buy back the company. They are also locked in a legal battle with eBay over the core technology behind Skype’s VoIP service. A foolhardy IPO may be Donohoe’s way of thumbing his nose at the European innovators.

It is certainly not the way to “give Skype the focus and resources required to continue its growth and effectively compete in online voice and video communications,” as Donohoe stated yesterday. Wall Street is less and less the money machine for technology entrepreneurs as it was around the turn of the century.

Earlier this week, San Jose Mercury News columnist Chris O'Brien observed that the number of public companies in Silicon Valley has fallen for eight years in a row, to below the 1994 level. “This is now an unmistakable trend that represents the end of an era defined by a grand partnership between Silicon Valley and Wall Street,” O’Brien stated, an alliance that “fueled a model for funding innovation that became the envy of the world.”

Unfortunately, that model is obsolete – not only because Wall Street, as you might have noticed, has its own troubles to deal with these days, but also because private financing is in many ways a better route for both young and established companies. Asked onstage at VoiceCon why he decided late last year to take over as CEO of telecom equipment vendor Avaya, Kevin Kennedy gave as his first reason the fact that the Lucent spin-off went private two years ago. Private equity funding, he says, gives him the breathing room and the stability to rebuild the company and focus on great technology and innovative products – not the next quarterly earnings call.

To be sure, the stock market is the only option for companies of a certain size – say, Intel, which just reported revenue of $7.15 billion, down 26 percent from the same period a year ago but still better than dismal Wall Street expectations.

But many companies have gone public in the last decade that never should have. And in the boom years for IPOs, many tech venture capital firms lost their way, becoming ATMs rather than cradles of innovation. Because VC returns are way down, there’s now significant wealth available through private equity, from investors who are more patient and more diligent (I almost wrote “serious”) with the companies they fund. Combined with the long-term view of many private investors, the discipline of no longer having an easy escape hatch via the public markets will be a good thing for tech and telecom ventures. It’s kind of like getting married: If you’re husband-hunting, do you want the flashy, Ferrari-driving sportsman who might dump you in a few years for a younger model, or the solid, staid type who’s going to support you in lean times?

Given that eBay has pre-announced an IPO at least a year in advance, the public offering could just be a negotiating ploy to drive up the price of a Skype buyback by Zennstrom and Friis. If so, more power to Donohoe. I wouldn’t bet on seeing an actual Skype offering next year or any other year: Zennstrom and Friis, not to mention Skype CEO Josh Silverman, are way too smart for that.

This week and next we will see how the public markets are viewing tech companies in the recession: Reporting earnings before the end of the month are Google, Yahoo, Advanced Micro Devices, Apple, Sun Microsystems, and McAfee. And, oh yeah, that online auction company you may have heard of reports on Wednesday, April 22. The prospects look bleak: eBay’s share price is down down 53 percent in the last year.