Will IPO Resurgence Continue in 2nd Half? –

The venture-backed IPO floodgates opened wide during the second quarter of 2004, and they didn’t even need Google’s mammoth offering to help pick the lock.

A total of 30 VC-backed companies priced IPOs on U.S. stock exchanges during the second quarter, according to Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association. It is the highest quarterly tally since 87 such companies priced in Q3 2000, and it represents more than a 130% jump from the 13 deals that priced during Q1. Also, the 30 new offerings last quarter exceeded by one the 29 VC-backed IPOs that priced throughout 2003.

Despite some jitters in tech stocks caused by concerns about the chip business, the IPO window remained open in mid-July. During the first week of Q3, two VC-backed companies went public. KongZhong Corp. (Nasdaq: KONG), a Beijing, China-based provider of wireless interactive entertainment and which is backed by Draper Fisher Jurvetson ePlanet Ventures, Calver Investments and eGarden Ventures, launched an IPO worth about $80 million. And NetLogic Microsystems Inc. (Nasdaq: NETL), a Mountain View, Calif.-based semiconductor company that develops processors for advanced networking systems, raised around $109 million in total VC funding since its 1998 inception, from investors like Sevin Rosen Funds, Global Link 1 Capital, Perham Ventures and the Huntington Technology Fund. It launched a $70 million IPO.

The offerings are somewhat modest beginnings to Q3. Many IPO observers are certain the second half of the year will get a boost as the Internet search provider Google prepares to launch its $2.7 billion IPO in an auction-style offering that is expected to go this summer, at the earliest.

“If the market continues to hold, we’ll see IPO traffic continue to flow,” says John Fitzgibbon, an IPO analyst for Redherring.com. “Security markets are driven by interest rates, earnings and politics, and politics is a big question right now.”

Lots of companies are praying the window remains open. As of the end of Q2, some 175 companies-including about 80 venture-backed companies-were in registration.

Looking back at the second quarter, VC-backed companies raised $2.18 billion, down from $2.72 billion the previous quarter. But the Q2 decline can be explained by the Q1 IPO of Semiconductor Manufacturing International Corp. (NYSE: SMI), which skewed the data by pricing a $1.8 billion offering in March. When you factor out that particular deal, the average deal size of venture-backed offerings actually increased from the first to second quarter, from $69.2 million to $72.6 million, respectively.

While the average offering size increased, many VC-backed IPOs have been unable to meet their offering targets. Of the 30 companies that priced, only five (SiRF Technology inc., Cytokinetics Inc., Blue Nile Inc., Leadis Technology Inc. and Blackboard Inc.) raised more than they sought. The remaining 25 VC-backed IPOs last quarter came in under-target, including a quintet of drug companies that filed for $86.25 million offerings but only managed to raise around $35 million.

Because so many new issues have been “priced to sell,” their aftermarket performance has been strong, Fitzgibbon says. As a group, all of the IPOs that have priced this year (including non-venture deals) are up 11.7% from their offering prices, compared to a 2.2% gain in the Nasdaq in the first six months of the year, Fitzgibbon says.

He notes that 11 of the last 13 IPOs to price have been below their initial filing range. “Companies need the cash and are willing to accept what the buyers are willing to pay,” Fitzgibbon says. Another factor is that venture capitalists are encouraging companies just to get deals done so that they can get their money out, he says.

Blue Nile (Nasdaq: NILE), a Seattle-based diamond e-tailer, experienced the largest percentage increase in its stock price. Nearly two months after its debut, the stock was trading up 66% from its $20.50 IPO price to $34.11 on June 30.

Blue Nile raised over $56 million in VC funding from investors like Bessemer Venture Partners, Trinity Ventures, Lightspeed Venture Partners, Vulcan Ventures and Kleiner, Perkins, Caufield & Byers. Thanks to Blue Nile, Bessemer was one of the biggest IPO winners among VC firms in the second quarter. Its 2.8 million shares of Blue Nile were valued at about $107 million on June 30.

Another strong performer was Santarus Inc. (Nasdaq: SNTS), a San Diego-based drug company, which priced at $9 per share and closed at $13.43 July 12, a nearly 50% increase. It raised more than $90 million in VC funding, including investments from St. Paul Venture Capital, Domain Associates, Advent Venture Partners, JPMorgan Partners (JPMP), S.R. One Ltd. and Life Sciences Partners.

Santarus was one of the few drug companies to have great success on the IPO market lately. The quarter’s biggest aftermarket bust was Corcept Therapeutics Inc. (Nasdaq: CORT), which priced at $12 per share, but closed July 12 at $5.20, a 56% decline. Corcept’s venture investors include Alta Partners, Sutter Hill Ventures and Maverick Capital.

The second quarter’s largest venture-backed IPO got done near the close of the three-month period. Life Time Fitness Inc. (NYSE: LTM) priced 9.9 million common shares at $18.50 per share, for a total IPO take of just over $183 million. The Eden Prairie, Minn.-based operator of family fitness and recreation centers had previously raised around $87 million in VC funding from firms like Norwest Equity Partners and Apax Partners.

Next up was Cabela’s (NYSE: CAB), a Sidney, Neb.-based retailer of hunting, fishing and camping merchandise. The company raised $156.25 million by pricing more than 7.8 million common shares at $20 per share. The company had entered into a recap deal led by JPMP last September, but is being counted as a VC-backed deal because JPMP did not take a majority ownership position.

Other big winners included Shanda Interactive Entertainment Ltd. (Nasdaq: SNDA), SiRF Technology (Nasdaq: SIRF) and SalesForce.com Inc. (NYSE: CRM).

Additional reporting by Lawrence Aragon and Alastair Goldfisher.