VCs Feel the Love from Wall Street –

It started slowly, with just one venture-backed IPO in January, followed by a half-dozen in February. But when the final tally was made, 2004 turned out to be the strongest year for initial public offerings since the Internet bubble.

A total of 216 companies went public last year, three times the number for the previous year and the best showing since 2000. Better yet, new issues from venture-backed companies made up nearly half of the total.

There were lots of subplots to the IPO story: Google’s offering brought Ron Conway’s Angel Investors back from the dead; nanotech upstart Nanosys surprised the market by filing for an IPO then surprised it again by yanking it; and China reared its head with the “knock the cover off the ball” successes of 51job and Shanda Interactive.

But looking back over the last year, the biggest story was the return of biotechnology and medical device IPOs. Together those two sectors made up about 40% of the year’s 91 venture-backed offerings. Alta Partners, JPMorgan Partners (JPMP) and MPM Capital each had long lists of IPO success stories in the incredibly tough world of biotechnology and life sciences. For the year, there were 24 pharmaceutical-related IPOs and another 13 medical technology IPOs. The closest runner-up categories were venture-backed Internet companies (with 16 IPOs), semiconductor startups (with 10 new issues) and enterprise software makers (with seven IPOs).

For many VC firms, the year represented a lifeline for the success of 1998-2001 vintage funds, and it provided much needed liquidity after three prior years of exits largely based on M&A, sell-offs or write-downs. The list of most active VC firms exiting through IPOs in the year was led by JPMP and Alta Partners, both with nine IPOs. MPM Capital was close on their heels, with eight exits in biotech and life sciences.

It isn’t surprising that JPMP shares the top spot, given the size of the firm, its global presence and possession of both IT and life sciences practices. Alta, on the other hand, came out the blue. A fraction of the size of JPMP, the San Francisco-based firm (not to be confused with Alta Communications) made all of its exits through its life sciences practice, dwarfing the performance of better known Silicon Valley firms.

“It just didn’t happen overnight,” says Guy Nohra, co-founder and director of Alta. “Back in the late 1990s, when everybody got out of life sciences, we doubled down on it. In fact, that’s when we raised our first late-stage fund for life sciences [Alta Biopharma Partners].” Three of the nine IPOs were for companies funded by Alta Biopharma, five by an early stage life sciences/IT fund (Alta California Partners) and two were backed by both of the funds.

Alta was just one of several firms with many IPOs to its name, but the good news for the industry is that there were so many different firms represented: More than 150 different firms ended 2004 with at least one IPO to their credit.

In the white-hot sector of life sciences, the best performing venture-backed IPO came from EyeTech Pharmaceuticals, which makes drugs to combat eye disease. It priced at $21 per share on Jan. 30 and ended the year at $45.50, up 117 percent. That was great news for its plethora of venture backers. JPMP topped the list with 4.3 million shares worth nearly $200 million at year-end. It was followed by Bellevue Asset Management (holdings worth $156 million), Schroder Ventures Life Sciences ($130 million), MPM Capital ($125 million) and Merrill Lynch Capital Partners ($123 million).

In medical devices, the best performing venture-backed IPO came from Syneron Medical Ltd. of Israel. The company, which makes “aesthetic medical products” for hair removal, wrinkle reduction and the like, priced at $12 per share on Aug. 6 and closed the year at $30.60, up 155 percent. The lone VC winner in that deal was Israel Healthcare Ventures, whose 2.7 million shares were worth in excess of $80 million at the close of the year.

After biotech and life sciences, IPO activity was concentrated mainly in four areas: the Internet, semiconductors, enterprise software and services, and wireless services.

The Internet

The best news of all for most IT-focused venture firms was finally being able to take Internet-based companies public. Many of the IPOs were from investments made between 1999 and 2001 in companies that at the time heralded that they were dot-coms. This year almost every one of them stressed its position in mainstream markets and only mentioned the Internet in passing. The list of Internet IPOs is long and varied. The year started with Shanda Interactive Entertainment Ltd.’s IPO May 13. Shanda (Nasdaq: SNDA) represents a trifecta of hot topics: the Internet, gaming and China. Its share price soared 286% during the year, rewarding early investors Cisco and Softbank and anyone else who bought shares in its IPO.

After Shanda, the appetite for Internet-based offerings grew stronger. Next up was Blue Nile (Nasdaq: NILE) on May 20. While it doesn’t have a China component, the online diamond merchant epitomized of the breed of online retailers that survived the dot-com era to become viable online retailers or sellers of services online. The biggest VC winner in Blue Nile’s offering was Bessemer Venture Partners, followed by Kleiner Perkins, Trinity Ventures and four others.

Within a month a long string of Internet companies that had been waiting in the wings dashed onto the IPO stage: 51Job (a Chinese job portal and the second best-performing VC-backed IPO of the year), Arbinet (online exchange), Archipelago Holdings (online stock exchange), Celebrate Express (online party goods), China Finance (online financial services), Design Within Reach (a furniture seller with an online component), eLong.com (online Chinese travel service), Google and Gurunet (search engines), HouseValues (online real estate brokerage), Market-Axess (online bond trading), MortgageIT (online mortgages), PlanetOut (website serving the gay community), Shopping.com (online retail), and ZipRealty (online real estate brokerage).

The biggest winner was Google, of course. Even with the frothy $85 price of its Dutch-auction IPO, the company’s stock soared 127% to $192.79 by the end of the year. Because they got into the company so early, Sequoia Capital and Kleiner Perkins were rewarded with the biggest IPO payout for venture capitalists in 2004: Sequoia’s 23.9 million shares were valued at $4.6 billion and KP’s 21 million shares were valued at $4 billion by year-end. Even tiny Angel Investors made out like a bandit on the deal: Its 831,000 shares were worth $160 million at the close of the year.

Chips

Honors for the biggest venture-backed IPO of the year went to Semiconductor Manufacturing International Corp. (SMIC), a firm representing two of the hottest topics for the year: China and semiconductors. It raised $1.8 billion, dwarfing even mighty Google. Overall, it was a great year for semiconductor and semiconductor-related companies. Nearly two dozen VCs will attest that 2004 was the best year for semiconductors in the last five, with successful IPOs coming from Atheros, Cascade Microtech, Leadis Technology, Monolithic Power, NetLogic, Portal Player, PowerDsine, SiRF and Volterra. Four of the companies ended the year with share prices below their offering prices (SMIC, Atheros, Leadis and NetLogic), but six others held their own on the volatile Nasdaq. The biggest winner was Volterra, which priced at $8 per share and ended the year a little above $22, rewarding Kleiner Perkins, Invesco Private Capital, Morgenthaler Ventures and Integral Capital Partners, whose shares were collectively worth in excess of $170 million at year-end.

Wireless

There is another group of companies that made it out last year that all have a strong component of their business in the Internet, but most will always think of them as wireless services providers. First out for the year was China’s Linktone, which started the year strong, but ended up, like most of the firms in this group, selling well below its offering price. Second up was Jamdat, which sells wireless entertainment and information services, and whose price held up across the year. InPhonic, which has both wireless and Internet components for its sales of wireless services, was another firm that ended the year on an up note. KhongZhong, which spent most of the year on the list of worst-performing Nasdaq stocks, managed to finish the year near its offering price.

The best performer in the group was InPhonic (Nasdaq: INPC), which saw its share price rise 45% by the end of the year. The investment paid off handsomely for Technology Crossover Ventures, whose 8 million shares were worth more than $220 million at year-end, and RAF NetVentures, whose 1.6 million shares were valued at more than $40 million.

Enterprise Software/Services

Despite the fear and uncertainty caused by the takeover of PeopleSoft by Oracle, VCs were able to squeeze several enterprise software and services offerings into the market: Blackboard (educational enterprises), SaleForce.com (sales enterprises), Motive (general enterprise uses), Phase Forward (biotech enterprises), Kanbay International (financial services), RightNow Technologies (general enterprises) and Ninetowns (enterprise software for Chinese companies).

The biggest gainer in the group was Kanbay, which provides software and IT services for financial institutions like Household International and Morgan Stanley. Its stock price shot up 141% to $31.30, rewarding Cross-Atlantic Capital Partners (2.8 million shares valued at more than $88 million) and Morgan Stanley Private Equity (1.5 million shares worth more than $48 million).

One footnote for the year. Israel, whose VCs like to brag that the startups they incubate make up the second largest component of the Nasdaq (after Canadian companies) was passed in the number of IPOs originating in yet another foreign country: China. With eight new issues, China had double the number of offerings from Israel-based companies. Moreover, the year’s biggest IPO (SMIC) and two of the year’s biggest gainers in share price (Shanda Interactive and 51job) originated in China. Not that Israel had a bad year: Syneron, an Israeli medical technology company finished the year up 155% over its offering, and GuruNet was up 74% from its offering price at year-end. Still, 2004 was clearly the year that China arrived on the public equities scene.

Lawrence Aragon contributed to this story.

Email: jborrell1@thomson.com