Remarkably, almost half of all the venture-backed startups from 1999 and 2000 have survived. A first wave went public last year, including Google Inc. (GOOG
), and now a bigger wave of perhaps a few dozen outfits is set to follow. The best of the bunch, such as TellMe, sport fast-growing revenues and, in many cases, profits.
An old adage in the VC business holds that the best startups are built during bear markets. While the post-boom downturn didn't kill off every flimsy venture, it did impose frugality on many young outfits. "We saw a lot of companies forced to spend less money to acquire more revenue," says Kevin Harvey, a general partner at Benchmark Capital in Menlo Park, Calif. With fewer competitors, smart startups could quickly grab big chunks of their respective markets.
That's what happened at TellMe. While several competitors either folded or were acquired, the company stayed focused on winning large corporate clients that use its voice software for customer service. TellMe turned profitable last year after roughly doubling revenues in each of the last two years, and is on track to post $100 million in sales this year. "They're going to queue the company up as a 2006 IPO and try to create a Google-like energy behind it," says one venture capitalist familiar with TellMe. McCue says the company is in a position to launch an IPO at any time but hasn't set a date.
Also mum about its plans is Vonage Holdings Corp. Founded in 2001, the Edison (N.J.) provider of Internet phone service has raised $210 million and last year racked up about $100 million in revenue. It has spent enough on marketing in a bid to make itself a household name, and several VCs say it will go public this year or next. But critics complain that while its ads attract new customers, it doesn't retain as many as it should.
The networking equipment sector hasn't produced a blockbuster deal since NetScreen Technologies Inc. went public in 2001. But companies such as Force10 Networks, Peribit Networks, and Calix have since developed into serious IPO contenders. "We spend a fair amount of time talking to the buy side, and the appetite is strong," says Andrew Feldman, vice-president of marketing at Milpitas (Calif.)-based Force10, which expects at least $50 million in revenue and should turn profitable this year.
Since September 11, venture firms have pumped lots of capital into security technologies. Those investments have produced promising IPO candidates, such as Fortinet, CipherTrust, and ArcSight. Sunnyvale (Calif.)-based Fortinet, which aims to turn profitable in the third quarter, would like to go public later this year at a valuation of $750 million to $900 million, or five to six times its projected 2006 revenues, says Chief Financial Officer Harold Covert.
All the same, investors shouldn't get carried away. For every TellMe or Force10, there are hundreds of other companies that lack either the earnings or revenues to go public. Not that they won't try.
So far, IPO investors are keeping their standards high. The latest example: On Feb. 11, money-losing online retailer SmartBargains.com LP had to withdraw its IPO because of a lack of demand. With a backlog of quality companies itching to go public, buyers can still be picky. By Justin Hibbard in San Mateo, Calif.