Dot-Coms Hope To Cash In On IPO Resurgence –

Intel Capital had two. So did Kleiner Perkins Caufield & Byers and Summit Partners.

That three venture firms could boast that more than one of their portfolio companies went public in the third quarter is the clearest sign yet that the IPO market is alive and well.

“It is a selective market, but the window is open,” says John Fitzgibbon, a longtime IPO analyst who tracks the market for Redherring.com. “Over 200 deals have gotten priced and traded in the past 12 calendar months.”

As VCJ went to press, October was on track to be the “the best October since 1999,” Fitzgibbon says. Eleven new issues had priced as of Oct. 14 and another 17 were set to price later in the month.

Among the venture-backed companies waiting in the queue were four dot-coms backed by a combined 20 venture funds:

* Celebrate Express. The online party supply merchant has $28.5 million in backing from Advanced Technology Ventures, Arch Venture Partners and Sigma Partners, according to the MoneyTree Survey conducted by PricewaterhouseCoopers, Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association.

* eLong. The online travel service has raised $75 million in two rounds in the past two years from Blue Ridge Capital and Tiger Technology Performance.

* Shopping.com. The online shopping engine has in excess of $75 million from 14 investors, including Axiom Venture Partners, Bain Capital, Hollinger Capital and Israel Infinity Fund.

* SmartPros. The online site, which offers continuing education for professionals, has $5.8 million in funding from Deutsche Bank’s DB Investor group.

Cause and Effect

What’s behind the resurgence of the IPO market? Fitzgibbon says that four factors are at work: The “dot-com insanity” has washed out of the system, institutional investors have gotten more aggressive, bankers are pricing only those companies that are (for the most part) profitable and growing, and new issues are being priced to sell, as evidenced by the strong performance of the aftermarket.

All of these factors helped to make Q3 the biggest quarter in four years for venture-backed IPOs. In all, 24 such companies went public, raising about $3.2 billion, according to Thomson VE and the NVCA. That was an increase of more than 50% from the $2.08 billion raised by venture-backed companies in Q2.

The star of the third quarter was none other than Google. The Menlo Park, Calif.-based search engine company had the most celebrated IPO in recent memory. The company priced a $1.67 billion offering on Aug. 19, which accounted for more than half of the venture-backed IPO market’s third quarter tally, although it could’ve been more.

Google at one point had hoped to raise upwards of $3.8 billion by pricing more than 24 million common shares at $135 per share. Those multi-billion-dollar dreams were dashed by a complicated offering device, an untimely interview with the company’s founders in Playboy magazine and general skepticism among certain public investors.

That led Google to reduce its offering size, which had been expected to include a combined 4.5 million shares from investors Kleiner Perkins and Sequoia Capital. Instead, the two firms received no liquidity from the IPO, while company founders Larry Page and Sergey Brin netted $43 million each.

The VCs may have the last laugh, however, as Google has been a strong aftermarket performer. Its stock price closed at $142 a share on Oct. 14, which would make the stakes of Kleiner Perkins and Sequoia worth more than $3 billion each. Not too shabby, particularly when one considers that the two firms invested about $30 million combined.

No other VC-backed company experienced a $44 per share increase, but VC-backed IPO aftermarket performance far outpaced overall public market performance. The tech-heavy Nasdaq posted a 7.4% decline in Q3, its worst quarter in two years.

Venture-backed IPOs, on the other hand, posted a great quarter and have had a solid year to date. Of the two-dozen VC-backed companies that went public in the third quarter, 18 experienced an uptick in their stock prices.

By the Numbers

The average price of a Q3 venture-backed IPO was $13.50. By the end of the quarter (Sept. 30), the average price had shot up 29% to $17.38.

While not as wildly successful as the third quarter, the first nine months of this year have seen a solid performance from venture-backed new issues. A total of 66 venture-backed companies went public between Jan. 1 and Sept. 30, with an average price of $12.38 per share. The average share price at the close of the quarter was $14.26, a 15% increase.

The aftermarket performance of venture-backed companies is only slightly below that of the 162 total companies that went public in the first nine months of the year. The typical IPO gained about 17% from its initial offering to the end of the quarter, Fitzgibbon says.

Outside of a big surprise, the market is expected to keep chugging along. The market has already factored in rising interest rates, rising oil prices, expectations about earnings and the presidential election, Fitzgibbon says.

For Q3, the biggest percentage gainer among venture-backed IPOs was RightNow Technologies Inc., a Bozeman, Mont.-based provider of online customer support software and services. Its IPO priced on Aug. 5 at $7 per share, and closed out the quarter $12.53 per share, up nearly 80 percent. That was great news for RightNow’s backers, Greylock and Summit Partners.

Other big gainers included Volterra Semiconductors with a 55% increase, good news for backers Kleiner Perkins, Intel Capital and others.

The biggest loser was NetLogic Microsystems Inc. The Mountain View, Calif.-based semiconductor company lost more than 45% of its $12 per share IPO price, which can’t have pleased backers Sevin Rosen Funds and J&W Seligman.

Quick Hits

Other tidbits from Q3:

* After Google’s billion-dollar-plus IPO, the quarter’s largest VC-backed offerings came from MortgageIT Inc. with $172.5 million, Ness Technologies Inc. with $140.6 million and Archipelago Holdings with $126.5 million.

* The IT sector led the way with 13 offerings that raised a combined $2.6 billion. Eight life sciences companies raised $413.6 million, while three other companies netted $238 million.

* The average age of VC-backed IPO companies was around 6.4 years in Q3, compared to about 9 years in Q2, and a two-year average of 9.6 years.

* Eight VC-backed companies pulled IPOs during the quarter. Another 88 remained in registration.

Email: daniel.primack@thomson.com

Email: lawrence.aragon@thomson.com