Going public? Encouraging signs

NEW YORK (CNNMoney.com) -- Two successful venture capital-backed initial public offerings in as many days have created a buzz that the IPO market is opening up.

The market for public offerings this year has been sluggish at best as backers have been wary of taking small, virtually unknown, companies public in an environment where stocks have been wildly gyrating, credit conditions have been tight and the economy has remained mired in a recession.

The tide may be turning. Four venture capital-backed companies have gone public in the past two months, including network software company SolarWinds' (SWI) IPO on Wednesday and online restaurant reservation company OpenTable's (OPEN) on Thursday. That's a good start compared with last year, when only six venture capital-backed firms went public.

"Do we see a trend? Yes we do. The market is starting to open up," said Kathy Smith, analyst at Renaissance Capital LLC.

Investors seem to like what they're seeing.

SolarWinds is trading more 10% above its initial asking price, and OpenTable's stock was up 67% on Thursday.

"The latest two IPOs are clearly encouraging, but we're not declaring a recovery just yet," said Emily Mendel, spokeswoman for National Venture Capital Association (NVCA). "We'll be watching to see how they're doing: If these companies do well, it will be a tremendous boost of confidence."

Recent IPO levels pale in comparison to previous years. In 2007, 86 VC-backed companies went public, and in 2006, there were 56 VC-backed IPOs, according to NVCA.

Furthermore, the other two VC-backed IPOs this year, DigitalGlobe (DGI) and Bridgepoint Education (BPI), started strong on their first day, but tapered off recently. Shares were up 13% and 6% after one day, but are now down 4% and 5% respectively.

Narrow pipeline. It will likely take a while to rebuild the pipeline of VC-backed companies that are ready to be taken public.

Typically, VC investors take the proceeds from companies go public, funnel them back into new companies, and the cycle continues.

But the recession put the brakes on VC-backed IPOs with many VC firms opting to hold onto companies until market conditions turned. Venture capitalists invested just $3 billion in 549 companies during the first quarter of 2009. Last year, they invested an average of $7 billion in 975 deals per quarter, and in 2007, they invested $7.7 billion in 1,000 deals each quarter.

Mendel thinks that the IPO market will recover, but not before late 2010. She said an investment level of $6 billion to $8 billion per quarter would signal a healthy level of investment.

"We don't want it to be too big," she said. "We went down that road before, and look what happened."

Of the 80 companies that have registered for IPOs over the past year, only 19 are VC-backed. But on the bright side, 10 of those were registered in the past two months.

Eight are biotech companies, and many are clean energy related, including Nexsan Technologies, which makes energy efficient data storage systems; First Wind Holdings, which specializes in wind energy products; and A123 Systems, which is developing lithium ion batteries for electric cars.

Other notable VC-backed IPOs in the pipeline include ePocrates, a company that makes medical software that can give physicians drug interactions, disease and laboratory information on their smartphones. LogMeIn gives users remote access to their computers, and NextG Networks is designing more aesthetically pleasing cell phone towers that also improve wireless capabilities.