I’ve got to admit it’s getting better
A little better all the time
John Lennon and Paul McCartney certainly weren’t thinking about initial public offerings when they penned those lyrics. But if IPO market watchers were looking for a theme song for 2010, they could do worse than the 1967 ditty “Getting Better.”
While the volume of venture-backed IPOs remained below historical norms, the new issues market demonstrated a marked improvement over the prior two years. Between January and mid-December, 68 venture-backed companies raised $6.4 billion in initial public offerings on U.S. exchanges, according to Thomson Reuters (publisher of VCJ). It was a sharp improvement over 2009, when just 12 companies raised $1.64 billion through IPOs, and an even sharper improvement over 2008, when just six went public and raised just $470 million.
Heading into 2011, venture investors, entrepreneurs and service providers see reason for further optimism on the IPO front. For one, the second half of 2010 was much stronger than the first six months of the year for new offerings, accounting for about two-third of dollars raised, giving market watchers reasonable expectations the momentum will carry into the New Year. Recovery in broader markets from the lows of the 2008 credit crisis bodes well for pricing. So does the demonstration by large acquirers, such as Hewlett-Packard, that they’re willing to shell out billions for public, venture-backed companies, as they have with their acquisitions of 3Par and ArcSight.
“Today, the outlook for IPOs is better than it’s been for the last three years,” says Steve Bochner, CEO of Wilson Sonsini Goodrich & Rosati, which represented a half-dozen companies that carried out IPOs in 2010, including Pacific Biosciences of California Inc.and Tesla Motors. In addition to seeing more companies actually going public, Bochner says, there’s been a considerable uptick in behind-the-scenes activity among mature venture-backed companies looking to prepare themselves for a potential offering over the next year or two.
That said, Bochner notes, venture-backed companies still face a host of obstacles that they didn’t have to deal with a decade ago. These include increased regulation, scarcity of analyst coverage for small- and mid-cap companies, and decreased institutional investor appetite for less mature companies. Moreover, prospective public companies, which must already comply with the cumbersome Sarbanes Oxley statute, will now need to prepare for increased regulation under Dodd-Frank.
Public market investors are also increasingly risk-averse. So says Mark Leschly, managing partner at Rho Ventures, which had two portfolio companies—online advertising service provider ReachLocal and business software provider Intralinks—go public over the summer. These days, companies that are able to carry out IPOs tend to be fairly mature, with annual revenue between $75 million and $100 million, and either profitable or on a clear path to profitability.
“High growth, unprofitable companies aren’t so exciting,” he says. “Investment bankers will tell you: ‘We value predictability and recurring revenue.’”
Aftermarket Performance Varies
Of course, there are exceptions, Leschly says. Tesla Motors and Pacific Biosciences, for instance, raised $226 million and $200 million, respectively, in their offerings despite being deeply in the red. The electric carmaker and the developer of DNA sequencing technology reported losses of $56 million and $88 million, respectively, in 2009, and were on track to post greater losses in 2010.
Still, neither ranked among the top performers in aftermarket trading. Companies that posted the largest post-IPO gains were, by and large, ones that went public to relatively little fanfare.
RealPage, a developer of property management software, made its debut in August and was trading at more than double its initial offering price in late December, as was Motricity, a provider of data support services for wireless carriers.
As usual, a handful of venture firms logged a disproportionate share of IPO proceeds. Sequoia Capital appears to have led the pack, with 10 portfolio companies carrying out IPOs on domestic and overseas exchanges. The firm did particularly well with two of those offerings—Its 32% pre-IPO stake in Monrovia, Calif.-based prepaid card provider Green Dot was worth about $700 million near the end of the year, while its 62.5% stake in Shanghai-based mail order catalog company Mecox Lane was worth about $240 million.
Bessemer Venture Partners also did well. Four of its portfolio companies went public, including two in India—Orient Green Power and IL&FS Transportation Networks—and two on Nasdaq, including Aveo Pharmaceuticals and Broadsoft.
New Issues Weak
But while 2010 was, overall, a year of improving fortunes for venture-backed IPO exits, industry watchers note that the volume of new issues remains relatively weak by historical standards. After all, 2008 and 2009 were the worst and second-worst years, respectively, for IPO volumes going back to at least 1980, according to the National Venture Capital Association.
In terms of dollars raised through U.S. IPOs, 2009 was the second worst year, second only to 2008, since 1990.
Moreover, of those firms that managed to secure IPO exits, few could brag of quick hits. The average age of a company going public last year was 8.9 years, while the median age was 8.2 years, according to Thomson Reuters. Still, that was a bit better than last year, when the average and median ages were 10.5 years and 10.3 years, respectively.
Heading into 2011, many VCs remain bullish about prospects, given the robust supply of mature, private companies that have indicated interest in going public, should the IPO climate become favorable.
“If you keep the macro economic variables static, then I think it’s probably up 20% or more,” says Barry Eggers, managing director at Lightspeed Venture Partners, regarding IPO volumes. Eggers says that it’s likely momentum will continue into 2012 and 2013 as well, given the preponderance of disruptive technologies currently on the market from venture-backed companies.
Just where companies going public will be based, however, remains an open question. As of mid-December, the U.S. represented just a third of global IPOs, according to Renaissance Capital, and only about a sixth of proceeds from new offering.