VC-backed Hardware/Software IPOs Slow to A Trickle –

As the public markets continue to wallow in turmoil, staying above one?s offering price has become a trick of Houdiniesque proportions for almost all companies that have gone public this year. Nowhere has this difficulty been more evident than in the computer hardware and software sector which, to its chagrin, has watched investors reject the once seductive criteria of growth potential in favor of clear paths to profitability. As a result, hardware and software IPOs have sharply declined.

To wit: No fewer than 25 of the 61 companies, or 40.98%, to go public in August hailed from the computer hardware and software sectors — a clip that was largely maintained in September, when 10 of the 26 IPOs were from that sectors.

At the time, public markets were not in their current state of decay, and year-to-date IPOs were still well above offering. On August 17, for example, year-to-date IPOs were 38.01% above offering, while on September 17, they stood at 42.87% above offering. By October 12, however, they had slumped to 9.73% above offering, and by November 16, year-to-date IPOs stood 1.08% below offering.

Those depressed numbers naturally brought about a decline in initial public offerings during October and November, but syndicate desks have been especially careful to not to let hardware and software companies out of the gate. Only four of October?s 27 IPOs (14.81%) hailed from hardware and software and, through Thanksgiving, only two of November?s 17 IPOs were from the sector.

Enough To Go Around

Since August, the number of VC-backed hardware and software companies to go public accounts for nearly half of all companies from the sector to go public during the period. Concurrently, the number of all VC-backed IPOs since the beginning of the year accounts for just over half the number of all IPOs in that time.

But whether or not a hardware or software company is venture-backed seems to be of no consequence to the markets, if the numbers from the last three months are any indication.

Of the 16 hardware and software companies to go public since September through November 20, eight have been venture backed. As a group, however, their performance has been as dismal as that of the market. Although there were four winners and four losers, the group as whole was 9.42% below offering through Tuesday?s midday trading.

The best performer was scientific software producer Synplicity Inc. (NNM:SYNP) which, thanks to a humble October 12 offer price of $8, was trading close to 14 on Tuesday. Another notable winner was semiconductor manufacturer Transmeta Corp.(NNM:TMTA), which priced November 6 at a bold $21, and through mid-afternoon Tuesday was approaching the $29 mark. Another scientific software provider, Informax Inc. (NNM:INMKX), and e-learning software provider Docent (NNM:DCNT) were struggling to stay above water, as both were only 3% and 10% above offering Tuesday afternoon.

Although there were no more losers than winners, the losses were much more pronounced, at least through Tuesday?s trading. For example, another scientific software company named Genomica Inc. (NNM:GNOM), after pricing aggressively at $19 on September 29, and wireless communications software provider @Road Inc. (NNM:ARDI), which priced at $9 also on September 29, were both more than 60% down. Vastera Inc. (NNM:VAST) and ViryaNet (NNM:VRYA), both specializing in work-flow management software, were approximately 36% and 39% below offering.

Brave Faces

Despite the difficult times, many venture capital firms with computer-heavy portfolios are undaunted, promising to invest in the hardware and software sector as aggressively as they did during the up-market.

?Technology is not going to go away. It will still drive the world?s economy,? said Ravi Mohan, a general partner with Battery Ventures. There are a lot of great ideas out there, and we?re going to keep investing.?

Still, the changes in the market have forced venture capital firms to redistribute their emphasis on certain criteria. While strength of management team, growth and paths to profitability are still key considerations, the latter has certainly taken on more weight as investor skepticism has deflated the market.

?The identification and support of a business model has become more important,? said Mohan, adding that companies that try to aggregate customers first and worry about profitability later are increasingly told to go away.

The changing considerations and optimism can also be found among investment bank analysts, who are often still giving today?s losers the benefit of the doubt.

For example, Robin Roberts of Stephens Inc. initiated coverage of Vastera on November 3 with an ?outperform? rating, citing not only market size, but also predicting profitability for the Q3 2002. Ditto at Chase H&Q, where analyst Jim Pickerel, in a November 2 report, gave ViryaNet a ?buy? recommendation based on accelerating revenue growth, and a profitability forecast that was moved up from Q4 2001 to Q3.

?The gold rush times have gone away?but that?s fine,? said Mohan. ?There are great companies out there, and great venture capital firms are going to find them.?