Technology

A Comeback in the IPO Market


Entrepreneurs and venture capitalists took notice just before the Memorial Day weekend when two technology companies had their initial public offerings in a matter of 24 hours. OpenTable (OPEN), a Web site for making restaurant reservations, went public one day after SolarWinds (SWI), a networking software company. The activity ended a drought of venture-backed IPOs that began last August. "It signals that investors are looking for growth stories," says Robert R. Ackerman, managing partner of Allegis Capital, a venture firm.

Even before the two IPOs, Goldman Sachs (GS) organized an invite-only conference on May 12 in Silicon Valley, called "The Next Wave IPO Forum," in anticipation of an IPO rebound. Rather than organize multiple meetings around the country, Goldman Sachs invited dozens of venture capitalists and entrepreneurs to a gathering on Sand Hill Road so the bank could explain why it expects an upturn in public offerings later this year. Goldman said it sees 10 to 15 venture-backed companies that have already registered with the Securities & Exchange Commission and that could be ready to go public in fairly short order. One example: Medidata Solutions Worldwide, a provider of electronic data management software for the health-care industry. "It feels to us like the IPO market is opening up," says David B. Ludwig, a managing director of Goldman Sachs' technology, media, and telecom sector in the firm's Equity Capital Markets Group. "We expect to see an acceleration of filings in the next few months."

Not the Boom Days

No one is predicting a return to the boom-era days when more than 200 companies went public a year, but some financiers and bankers say the market could soon recover to the level of 40 or so venture-backed IPOs a year. To get there, market conditions must continue to improve, more high-quality companies need to file, and their stocks need to perform well after they go public. "Two IPOs don't make a trend but it's very hopeful," says Fred Wilson, managing partner with the venture capital firm Union Square Ventures. "I think we will see the end of the IPO drought for venture-backed companies within the next year, possibly by the end of this year."

If the stock market doesn't stabilize, many of the most promising companies can afford to sit on the sidelines. One tech company that had hoped to go public this year now doesn't see that happening until 2010. Melih Abdulhayoglu, chief executive of Comodo, a supplier of Web site and PC security technology, says the two recent IPOs "are a very encouraging early indicator. But we don't see it saying, 'Let's go.'" Other companies that have been mentioned by investment bankers as strong IPO candidates insist they're still years off. Facebook CEO Mark Zuckerberg said on May 26 that the company had no plans to sell shares to the public soon. Reid Hoffman, chairman of LinkedIn, the business-oriented social networking site, echoed the same sentiment. "We're focusing on how to create a massively big company," he says.

Still, one hopeful sign is that the recent IPOs have performed fairly well since their debuts. At the close of trading on May 27, OpenTable was priced at 27.44, up from a launch price of 20. SolarWinds was trading at 13.75, up nearly 10% from its IPO price. "It's exciting to be a company that maybe helps break the logjam and creates excitement in new issues coming back," says Michael S. Bennett, chief executive of SolarWinds.

Over the past few months, investors have shown more of an appetite for risk. Major stock market indexes have increased 25% to 30% since March. And the flow of money into equity mutual funds turned positive in May.

No Funny Stuff, Please

Venture capitalists and entrepreneurs are watching to see if the successful offerings prompt more startups to register to go public. So far, there has not been a wave of new filings. Two-thirds of the way through this quarter, only three companies have filed to go public: finance firm Sutherland Asset Management, oil and gas company Ellora Energy, and Chinese natural resource manager Tri-Tech Holdings. In the first quarter of 2009, five companies filed to go public. And while 20 venture-backed companies already are in registration, Mark Heesen, president of the National Venture Capital Assn., says some filed their papers mainly to attract potential acquirers. "They're saying 'Buy me,'" he says. One example: EBay (EBAY) says that it may take public its Skype operation, but analysts suspect that may be a negotiating tactic to sell the company.

Wilson says that VCs and entrepreneurs need to show investors that they are building stronger companies than in the past, particularly during the dot-com bubble when so many young, unprofitable startups sold stock to the public. VCs and startups have learned their lesson, he says. "Investors want companies that are easy to understand, that are leaders in their markets, and don't have any funny stuff on their balance sheets," says Wilson. "And that's what the venture capital industry is doing a better job at now."

Hamm is a senior writer for BusinessWeek in New York and author of the Globespotting blog. Ante is an associate editor for BusinessWeek.

Ante is an associate editor for BusinessWeek.
Stephen_hamm
Hamm is a senior writer for BusinessWeek in New York and author of the Globespotting blog.

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