VC Secondaries Dive In Second Half ’98 –

NEWARK, N.J. – Plagued by Wall Street’s downturn in the last two quarters of 1998, the venture-backed secondary public offering market recorded just 64 issues after a first-half total of 52, according to Venture Economics Information Services (VEIS), a data company affiliated with Venture Capital Journal.

Last year’s output marked the industry’s worst performance since 1994, when only 52 venture-backed companies held secondary offerings. VC secondaries have endured a steady decline each year since 1995, when they reached an apex of 121.

Predictably, software and services, the industry group that includes Internet investments, led all sectors with 23 secondaries in 1998, an increase of nine from 1997. Cash-hungry young Internet companies were wise to tap the public market in 1998, as investors seemed poised to throw dollars into virtually anything with a “.com” in its name.

“It takes a lot of cash to build a brand,” said Highland Capital Partners General Partner Dan Nova, whose portfolio company, search engine Lycos Inc., held a secondary in June. “[A secondary] makes sense if the company has a need for cash or large shareholders need liquidity.”

Demonstrating Internet companies’ quickness to tap the secondary market, three of 1998’s seven “double-dipper” companies that held both an initial public offering and a secondary in the same year were Internet-related. Search engine technology developer Inktomi Corp., one of the year’s most successful IPOs, went public in June at $18 per share and held a secondary in November, when its stock had soared to $140 per share. CDNow Inc., an online retailer of compact discs, and DoubleClick Inc., an online advertising solutions developer, also held secondaries.

Meanwhile, the beleaguered health-care and biotechnology sectors took a beating across the board in the public market, with just 15 secondaries last year, a decline of seven from 1997’s total. In a volatile market, investors have shied away from risky, early-stage biotech investments.

“The only biotech financings that can get done are later-stage companies that are considered a lock, with revenue right around the corner,” said Dick Smith, the director of syndication at NationsBank Montgomery Securities. One such medical-related company to find success in the 1998 secondary market was Coulter Pharmaceuticals, a developer of anti-cancer therapeutic products that is currently in Phase III or IV trials, said Stephen Holmes, a general partner at the company’s venture backer, InterWest Partners.

“The market is much more receptive to companies that have significantly reduced risk,” Mr. Holmes said, noting that Coulter, which held a secondary offering in late July, is “a success story in a dry year.” Conceding that less-developed biotech companies are running out of cash and struggling to find financing, Mr. Holmes predicted many ultimately would become acquisition targets.

Despite Wall Street’s consistency early in 1999, and an apparent comeback in the IPO market, Mr. Smith is still wary of things to come. The current market data can be misleading, he noted, because of the ongoing Internet craze. But that cannot mask what is taking place in the overall market.

“There hasn’t been a whole lot of people making a whole lot of money buying stock,” he said.