Will interest in growth overtake passion for profits?

Wall Street relaxed its standards in December. Just four of the nine VC-backed companies that went public were profitable, but the market didn’t punish the unprofitable ones like it had throughout 2006. In fact, all but two of the VC-backed companies recorded double digit percentage growth in their stock prices by the close of the month. The “worst” performer—MEDecision, which makes software for health care systems—was flat at $10 per share.

Surprisingly, the best performer in the group was an unprofitable company: Isilon Systems (Nasdaq: ISLN). The distributed storage systems company saw its stock price shoot up 78% on its first day of trading and finish the month with a gain of 111 percent. This for a company that lost $15 million on $41.6 million in sales during the first nine months of 2006. Wall Street hammered companies with those kinds of financials earlier in the year. Apparently, investors were impressed with the trend line of Isilon’s sales. Its revenue for the first three quarters of 2006 surged 235% from the same period a year earlier.

Does this mean that we’re entering a period of growth speculation by public investors? It’s too early to say. There is evidence that indicates they are just as concerned about profits as they were all year. Of the four profitable VC-backed IPOs, three posted the best aftermarket performance behind Isilon. The share prices of Allegiant, Heelys and IPG Photonics were up 56%, 53% and 45%, respectively, from their offer prices as of the close of December. —Alexander Haislip/Lawrence Aragon