VC-Backed IPOs Soar in Late Summer –

NEW YORK – In an overall lukewarm third quarter that saw single-digit growth in equity underwriting activity, 84 venture-backed companies held initial public offerings, raising $5.9 billion, to provide some heat.

From January to September 30, 180 venture-backed companies raised $13.02 billion and the average offering size was $72 million, according to data compiled by the National Venture Capital Association and Venture Economics Information Services, a sister company of VCJ. The total amount raised this year already has exceeded the $12.21 billion garnered during all of 1996, which was the previous record year for venture-backed IPO proceeds.

Is a strong a IPO market for venture-backed companies a self-fulfilling prophecy for increased venture activity? “We are running at a very quick pace, but are not overwhelmed,” says Ben Holmes, Internet analyst at IpoPros.com. “The supply will be there until the end of the year and beyond.”

Holmes adds that near-term concerns about a millennium meltdown will not cause investor trepidation, despite the fact that more than 75% of the venture-backed companies that went out last quarter are in the Internet, software or communications industries.

“Companies that need to make changes to combat Y2K have already taken care of things,” he said. “Companies that will be hurt are ones that live on a steady stream of a relatively small number of parts, or rely on other countries for supplies.”

Regionally, California saw 40 venture-backed companies graduate to the public market. Among the states battling for the remaining scraps, New York and Washington produced six IPOs apiece while Massachusetts, New Jersey and Texas each generated five red herrings that hit pay dirt.

However, some sources say technological improvements that make distance less of a factor could drive activity up in regions beyond the Golden State.

“You are going to begin to see a surge in deal flow in areas like Austin, Texas, Boulder, Colo., and Lawrence, Kan.,” Holmes said. “Many businesses are spun off from larger companies in these areas, that are hip places to be in.”

Regardless of the source, venture firms point to the shortened venture cycle as a main driver of foreseeable deal flow. As more entrepreneurs hustle through the private market, raising multiple rounds in a 12-month span, the IPO pipeline will likely remain full, especially when coupled with the values companies receive in the public market.

“For our companies, the initial value to us at offering was around $300 million,” said Nancy Dorman, general partner at New Enterprise Associates (NEA). “Those companies are now worth about $850 million.”

Dorman said NEA has had 13 portfolio companies hold IPOs as of the third quarter, and nine more are in registration.

Intel Corp., which primarily invests in companies that complement its bread-and-butter semiconductor business, backed 10 companies that went the distance, to lead the quarter. Patricof & Co. Ventures and NEA followed Intel in the rankings with eight IPOs and Kleiner Perkins Caufield & Byers rounded out the top rankers with six.

Perhaps seeking to emulate Intel’s success, Fortune 500 companies have begun to allocate more capital to venture investments, including Microsoft Corp., Seagate and Newscorp.

Despite the nearly quarter-long period of turbidity for public Internet companies, the most successful offerings came from that arena. Linux Software developer Red Hat Inc., networking manufacturer Alteon Websystems Inc. and Internet Capital Group, an Internet holding company, led the third quarter honor roll. All three companies have seen their shares hover above $100 in the public market after pricing at less than $20 per share.

The success of Internet Capital, which is backed by Safeguard Scientifics Inc. and Comcast Corp., illustrates investors’ bullish outlook for business-to- business companies.

Through September, 13 venture-backed IPO companies were trading below their offering prices, with JFAX Com Inc. bringing up the rear, trading at barely 50% of its $9.50 offering price. Condolences would happily be fulfilled by 1-800-Flowers.com Inc., which fell nearly a third off its $21 offering price and was trading at less than $15 per share at quarter’s end.