Setting Sail: A Tech IPO Armada
Why are champagne corks popping in Silicon Valley? Because the tech IPO party is finally back in swing.
(Business 2.0 Magazine) -- For the first six years of the century, the dream of building a technology company and taking it public was out of reach for all but a few lucky entrepreneurs.
Getting bought by a company with deep pockets (like Google (Charts) or eBay (Charts)) became the norm - and with the exception of a few standout startups (like YouTube or Skype), even that endgame didn't produce eye-popping returns.
Get ready for a tidal shift. Judging by the number of companies that have already filed or indicated that they might, 2007 is shaping up to be the biggest year for initial public offerings in the tech world since the end of the dotcom bubble in 2000.
"We're seeing strong interest from institutional growth funds looking to invest in new companies, and venture capitalists looking to bring their companies public," says Michael Moe, CEO of Think-Equity Partners, a San Francisco investment bank. "You're finally going to see some interesting, classic growth companies come out." In short, Moe adds, "it's fun again."
The 1990s-style fun began in the last six months of 2006, when Nasdaq rose almost 20 percent and filings by private tech companies to begin the IPO process were up 31 percent compared with the same period a year before. And no wonder: Tech IPOs in 2006 returned a healthy average of 37 percent over their offer prices, according to Renaissance Capital.
There was no single equivalent of Netscape, whose blowout 1995 IPO sparked the dotcom boom, but two tech IPOs were ranked among the best performers of the year: Networking equipment company Riverbed Technology (Charts) saw its value more than triple in the two months after its November offering. And the stock of storage firm Isilon Systems (Charts) shot up 77 percent on its first day of trading in mid-December, the best opening-day performance for a tech stock in six years.
It's about time. After the dotcom bubble burst, wary investors were unkind to all technology companies, especially startups. To reap returns from investments made in 1999 and 2000 or simply to break even - VCs were forced to look for merger and acquisition offers. Wily entrepreneurs learned to build companies fast and flip them fast. Now, with new funds to invest, everyone can afford to be more patient.
Of course, plenty of companies have been patient already. The bulk of IPOs likely to hit in the coming months are retreads, launches that were planned in previous years but pulled back because the market seemed unreceptive. They include wireless equipment company Aruba Networks, Wi-Max networking company Clearwire, software security company Sourcefire, and local cellular carrier MetroPCS.
"The VCs have been in the trenches with these companies for the past few years, waiting for the right time to go out," says David Menlow, president of independent research firm IPOFinancial.com. "Now we're seeing them prep a lot more deals to come to the public market."
That's causing a lot of excitement among entrepreneurs. Take Zach Nelson, CEO of NetSuite, an on-demand business software company backed by Larry Ellison. "Everyone wants to be bought by Google for $1 billion, but counting on that happening is not how to build a big company," Nelson says. "The way you get a big hit is to do an IPO. The appetite is there on the shareholder side to invest in new companies, and it's certainly there on the entrepreneur and the VC side to get back into the IPO mode."
To be sure, smooth sailing on Nasdaq is never guaranteed. For every successful IPO like Riverbed or Isilon, there is a Vonage (Charts): One of the most anticipated IPOs of 2006, the Internet phone company saw its value drop 60 percent between its May debut and January, battered by mounting losses and increased competition.
Call it a warning shot across Silicon Valley's bow: There will be no irrational exuberance this time around.
"The thing that's going to generate a lot of public excitement for tech IPOs is profitability," says Jay Ritter, a professor of finance at the University of Florida and a specialist in IPO markets. "The markets are still willing to fund companies that are showing losses, provided there is a plausible story for achieving profitability in the foreseeable future. But there has to be a lot more than optimism this time around."
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