Feature – Venture-Backed IPOs Soar Again –

There’s little doubt that venture-backed initial public offerings made a dramatic comeback last year: The 269 venture-backed companies that went public in 1999 more than triples the 77 companies that went out in 1998, according to Venture Economics Information Services, a sister company to VCJ.

And while most of those deals came from California, New York and Massachusetts – the three states hosted more venture-backed IPOs than the other 47 states combined – the $233 billion in proceeds raised through public offerings has found its way between the East and West Coasts.

To harness the windfall of capital, several regions throughout the country have reoriented their local economies to accommodate technology and new media start-ups. Perhaps the two most promising regions, according to venture capitalists, are Colorado and Texas, while Atlanta has also begun to garner ample interest.

VCs agree that Colorado has all the necessary ingredients for a hopping investment market. In addition to its storied history in telecommunications – powerhouses like Level 3 Communications Inc., Qwest Communications International Inc. and the former TCI Communications (now an AT&T subsidiary) all call the Rocky Mountain region home – and other big names like Sun Microsystems Inc. and Hewlett-Packard have major operations in the area.

“Several things have happened here,” says Elliott Husney, a partner at Wolf Ventures. “The telecom industry has found Denver and the rest of Colorado to be the center of the world itself and has brought in technical expertise, which will result in more venture spinoffs.”

As the sixth most active region in the country last year, Colorado-based companies received more than $1.22 billion in venture investments, only including those deals greater than $15 million.

Locals Provide Boost

Colorado has relied on the expertise of investors like Stephen Schovee to jump-start its marketplace. As a vice president with the state’s largest venture capital firm, The Centennial Funds, Schovee founded OneComm Corp., which was purchased in July 1995 by Nextel Communications for $750 million. Following that deal, Schovee formed Telecom Partners LP, raising $15.4 million for its first fund in November 1995. Since then the firm has raised two more funds, the most recent being Telecom Partners III LP, a $500 investment vehicle.

“The market is burgeoning, not exploding,” says Adam Goldman, a general partner at The Centennial Funds. “What we are seeing is several smaller VC firms that have been successful in their investments, able to go out and raise large funds, allowing them to expand their portfolios.”

In addition to the corporate element, the region has also experienced development in tangential sectors, which facilitate entrepreneurial and VC activity. The state’s educational infrastructure, for example, anchored by the University of Colorado, continues to raise the region’s profile. And while investors are aware that it isn’t quite like Stanford University or the Massachusetts Institute of Technology – two learning institutions that have driven the largest VC markets for years – UC and its neighbors are committed to developing entrepreneurial programs.

“We have the University of Colorado, Level 3 and Qwest, which have made substantial fortunes for people,” says Michael McCloskey, an associate at Century Capital Group Inc. “The path to the Austin [Texas] type of experience is going to be quicker because there is a precedent for it.”

Dell Delivers

Texas, for its part, is second only to California, having received more than $3.11 billion in venture disbursements, including only those greater than $15 million last year. But it’s only recently that the state saw so much activity. “Ten years ago there wasn’t that much happening in that marketplace,” McCloskey said.

The state, however, was home to the University of Texas and, more importantly, a dropout by the name of Michael Dell, who founded Dell Computer, which helped spark the region’s technological development.

Thanks to Michael Dell’s success, Austin has blossomed into a market that produces more than just blues guitarists and baby-back ribs. In addition to the region’s dominance in semiconductor designing – it is the nation’s second-largest designer after Silicon Valley – Austin excels in the software, telecommunications and Internet industries.

Five of the 14 venture-backed companies based in Texas that went public in 1999 have an Austin headquarters, including Garden.com, Bottomline Technologies, NetSolve Inc., Crossroads Systems Inc. and Classic Communications. Overall, the state’s new offerings raised $1.93 billion in the public markets, and these companies have a current aggregate market valuation of approximately $5.4 billion.

This public market success has catalyzed the region’s already booming venture activity. Last October, Austin Ventures raised its seventh investment vehicle, the $825 million Austin Ventures VII, which is more than double the size of the firm’s last fund. Concurrent with the close of Fund VII, Austin Ventures contributed to the first $60 million close of its affiliate incubator, AV Labs.

“The support for young companies in Austin is 10 times more substantial than it was 10 years ago,” says John Thornton, general partner at the firm. “The technological maturity supplied by the region’s private equity explosion reflects what is going on in the worldwide market.”

Garden.com, which raised $45.8 million in its IPO last September, is one of the few e-commerce business-to-consumer sites backed by Austin Ventures. Chief Executive Cliff Sharples, who co-founded the company with his wife in 1995, says local industries understand the effects technology has had on the region, thus producing an attractive environment for start-ups.

“The business community is geared toward fostering entrepreneurship and helping businesses grow,” he says. “The real estate, public accounting and law communities offer necessary services to growing companies, specifically in the technology sector.”

But Jeffrey Blanchard of First Capital of Texas, which recently opened an office in Austin, warns that the city’s technology-driven economy may be too closely aligned with the Internet and is vulnerable to bursting its bubble.

“A number of the successful IPOs were largely attributable to the market’s feeding frenzy for Internet deals,” he says. “If there were an ebb in the Internet economy, the city would not shut down, but business development in a variety of industries would certainly be affected.”

The South Rises

Like Austin, Atlanta is one of several academic-rich regions that have begun to harvest technology businesses from local universities. The Georgia Institute of Technology recently established an incubator program, which has contributed to a fertile entrepreneurial environment in the city’s once barren downtown region. Having recently merged with Atlanta-based Internet service provider Mindspring Enterprises Inc., EarthLink will move its headquarters from Silicon Valley to the Delta City.

In 1999, four venture-backed companies in the region together raised nearly $260 million through public offerings. In the aftermarket, IXL Enterprises Inc., nFront Inc., AirGate PCS Inc. and Telemate Net Software Inc. have a combined market capitalization of approximately $1.19 billion.

Atlanta-based venture firm Noro-Mosely Venture Partners backed nFront and Telemate. General Partner Charles Mosely maintains that the city, which is close to technology hub Research Triangle Park, N.C., has grown to become the Silicon Valley of the Southeast.

“Having already established telecom and software industries, Atlanta was prepared for the Internet phenomenon that swept the country,” he says. “While the multiple of investments is not nearly as large as Silicon Valley, the speed in which companies can now grow has increased investments by many multiples.”

Technology Builders Inc. of Atlanta recently raised $6.1 million in its third round of venture financing with plans of going public in early 2001. Chief Executive Nick Kavadellis says the technology required to support the region’s Fortune 500 companies has fed several start-ups.

“Delta Airlines needs online reservations and Coca-Cola and Home Depot need to keep current with technology,” he says. “Every traditional company needs to be in the software business to survive.”

When one considers that venture-backed consumer bidding service Priceline.com Inc. in early 1999 had a market capitalization greater than Delta, what is the point of having the traditional business in the first place?

IPOS by Industry

1995 1996 1997 1998 1999

Communications 19 29 10 12 50

Computer Hardware 14 18 9 2 5

Computer Software & Services 52 53 21 22 69

Internet Specific 6 19 14 5 91

Semiconductors/Othe Elect. 26 10 10 4 6

Biotechnology 14 27 22 6 6

Medical/Health 31 55 21 8 3

Consumer Related 12 23 12 12 21

Industrial/Energy 14 17 8 1 1

Other Products 16 29 11 6 19

Total 204 280 138 78 271

Source: Venture Economics/National Venture Capital Association