Outlook ’04: IPOs –

Coming off a strong fourth quarter, the market for initial public offerings is expected to take off in the New Year. If the highly anticipated IPO of Google Inc. does as well as expected and investors truly warm to technology and Internet-related offerings, bankers estimate that there could be as many as 125 U.S. IPOs this year, up from 88 last year, with technology-related offerings comprising a major chunk.

That would be great news for venture firms, many of which have been frustrated by a lack of exit opportunities. “Darwinism has not only applied to our portfolio companies, but to our own industry colleagues as well, particularly those who were unable to show any returns for their limited partners during the technology boom or at any point thereafter,” says Ravi Chiruvolu, a general partner at Charter Venture Capital. “In that sense, if VCs have felt the pain of the downturn, our limited partners have felt it twofold, thereby requiring returns on their capital now if for no other reason than to prove we should still keep our jobs … and they should keep theirs.”

War Snore

Despite the war in Iraq and other uncertainties, bankers are convinced the action will be in equities this year, with last year’s 25.3% gain in the Dow Jones Industrial Average whetting investors’ appetites. Other good omens: Interest rates are at their lowest point in 40 years, earnings reports are getting better, and it’s a presidential election year.

“All the lights are green,” says Doug Baird, head of U.S. equity capital markets at Deutsche Bank Securities. “The economic data that’s coming out is just spectacular, and equity valuations are holding the levels that they rallied through in late spring, through the summer and in the fall.”

New issues were one of the few capital markets products that did not do better last year than in 2002, with more than $55.1 billion coming to market in 2003, compared to $64 billion in the prior year. But they finished the year with a flourish, as 46 companies launched IPOs during the fourth quarter, 17 of them venture-backed startups.

Part of the reason for the optimism about new issues is that 31 venture-backed startups were in registration as of early January. Bankers point to that backlog as a sure sign that activity will increase. The current roster is weighted to technology companies, but bankers expect IPO activity in 04 to come from a broad cross section of sectors.

Among those waiting to make its debut is Motive Inc., an Austin, Texas-based provider of e-commerce services, which filed for a $70 million IPO in December. The company has received some $66 million in venture backing from Accel Partners, Austin Ventures, Dell Ventures, Palantir Associates, JPMorgan Partners and SSM Ventures.

Also set to debut is San Francisco-based SalesForce.com Inc., provider of customer service software. It has filed for a $115 million IPO. The company has received more than $60 million in funding from, among others, CSFB Private Equity, Dain Rauscher Corp., Geneva Venture Partners, CNet Chairman Halsey Minor, and IDG Chairman Patrick McGovern.

Even though it had not formally filed to go public, Google of Mountain View, Calif., was the most talked about potential IPO as VCJ went to press. Bloomberg had reported that Google choose Goldman Sachs and Morgan Stanley to be the lead managers, but the company declined to confirm the news.

Giddy for Google

“Everyone’s looking at Google as a sort of marquee Internet name and the first big bellwether,” says Brock Ganeles, head of equity capital markets for Merriman, Curhan, Ford & Co., a boutique investment bank focused on emerging growth companies. “Everyone has their eye on that deal, what the valuation will be and whether it triggers other deals.”

Even taking the Google Factor into account, investors are expected to generally steer clear of risk this year. That means the near-term outlook is uncertain for issuers in sectors such as biotech. The sector looked poised to take off with more than a dozen biotech companies filing for IPOs in October, but by the end of the month any optimism surrounding the sector had vanished. After investor skepticism led many of the new issues to perform below expectations, biotech issuers retreated to the sidelines, and most bankers have temporarily written off the sector.

Thus, it’s no surprise that ViaCell, a Boston-based biotech company developing stem cell therapeutics to treat cancers, withdrew its IPO on the last day of the year. Three other life science companies to withdraw IPOs were Tercica Inc., Acorda Therapeutics and Aderis Pharmaceuticals.

“The biotech area has gotten a bit tougher, but we do expect activity,” says Jay Chandler, a managing director and head of Merrill Lynch & Co.’s U.S. equities syndicate. “There will be opportunities for the best managed biotech companies to go public …but it’s not going to be as buoyant and active as it was [in October 2003].”

This story is reprinted with permission from Investment Dealers’ Digest. Additional reporting by Alastair Goldfisher.