IPOs still love U.S. markets

NEW YORK (Fortune) -- Each week, it seems, brings fresh protestations that the sky is falling on the U.S. capital markets. Nobody wants to list on U.S. exchanges anymore, goes the argument, because Sarbanes-Oxley has poisoned the well, because the U.S. regulatory climate is too onerous, because selling out is a far more favorable alternative than the tedium of going public.

Studies and conferences hammer home the point. Shortly after the New Year it was a McKinsey study prepared for New York's Mayor Bloomberg and Senator Schumer. (Question: Has McKinsey ever produced a report that contradicts the assumptions of its client? May I read it?)

This week the parent company of the New York Stock Exchange and Stanford University's Rock Center for Corporate Governance presents a seminar: "Can Our Capital Markets Be Saved and Do They Need Saving?"

The second question hits the mark: Of course they don't need saving. All they need are good companies, well informed investors and a robust economy. The proof is provided by the companies that choose, even in this supposedly horrible environment for public companies, to go public.

After all, 56 companies backed by venture capitalists went public in 2006 in the United States, raising a total of $3.72 billion, the highest number and largest amount raised since 2004, the year of Google, according to Dow Jones VentureOne. More broadly, a Thomson Financial survey of all U.S. IPO activity shows that the 189 IPOs last year raised nearly $43 billion, more than the $41.4 billion raised by 558 deals in 1997. In other words, there were fewer but higher-quality deals. More are on the way.

Take Limelight Networks, one of techdom's hotter companies, and its not-so-subtle IPO preparations. I had breakfast last week with Jeff Lunsford, an ex-U.S. Navy fighter jock, certified software geek and seasoned CEO who recently signed on to run the Tempe, Ariz.-based company.

Limelight runs technology that helps Web sites that broadcast videos to deliver them more quickly to consumers. Thanks to YouTube, MySpace and the like, it's a hot field, as evidenced by the rapid rise and rich valuation of Limelight's arch-competitor Akamai Technologies (Charts). (Akamai and Limelight are locked in patent litigation, naturally, another reason that nobody is supposed to want to do business here anymore.)

According to Lunsford, Limelight's business is sizzling. It's growing revenues at 100 percent per year, he says, and is an "index play" on online video. The company did $13 million in last year's second quarter, $17 million in the third quarter, and it's here that Lunsford clams up.

Why? Well, he can't say. But he does nothing to dissuade me from believing that shortly Limelight will begin the process of preparing its IPO documents. Securities lawyers don't want companies that are close to starting the IPO process to be discussing specific numbers in public, a response to quaint and useless rules designed to protect investors.

The point here is that if the U.S. capital markets were in trouble, Limelight would be figuring out how to go public in London or how to sell out to Akamai. It isn't.

If all goes as the investment and technology communities expect, Limelight's IPO will be huge despite the wrist slap one of its founders received in 2002 from the Securities and Exchange Commission. Co-founder Bill Rinehart paid a civil penalty of $110,000 for his role in an alleged financial fraud while a top sales executive at fallen software company Critical Path. Though he neither admitted for denied the SEC's allegations at the time, he did agree to a five-year ban from being an officer of a public company. That's why Rinehart's official title at the company is "co-founder" rather than an officer position.

The capital markets, you see, are functioning just fine. So long as Akamai trades for anywhere near the current 63 times 2006 earnings, Limelight is a shoe-in. (Google (Charts), by comparison, is worth about 48 times what analysts expect it will earn this year.) Limelight also needs the money for expansion. Goldman Sachs and two other firms invested $130 million in Limelight last summer, but the bulk of that money went to Rinehart and his three co-founders, not to the company.

The dream is alive, in other words, for entrepreneurs -- even tainted ones -- to bootstrap a company into a sizzling market and take their company public. These are markets that don't need saving.