Year in Review: IPOs

Few venture-backed companies raised money through IPOs in 2009. But it appears that plenty are planning to do so in 2010.

That, at least, is how the IPO market looked to be shaping up at year-end, with a pronounced uptick in the number of venture-backed companies filing for public offerings. Though only one venture-backed U.S. company, Fortinet, went public between November and mid-December, at least six VC-funded companies filed to take their shot at the public markets. And, according to attorneys and investment bankers who work with pre-IPO companies, behind-the-scenes activity suggests the new offering pipeline is poised to get fatter.

“I think in the last two quarters there has been more emphasis than I’ve seen in the last couple of years on companies preparing for a public offering,” says T. Hale Boggs, an attorney in the venture capital practice at Manatt, Phelps & Phillips. It’s not just that companies are preparing IPO filings, either. Many, Boggs says, are taking more preliminary steps, such as resolving outstanding accounting issues or raising bridge financing for marketing in an effort to raise their visibility and suitability for an IPO filing in the next year or so.

“I think there’s going to be a good IPO market for the next six to nine months because there are so many good companies that have grown to scale,” says Cameron Lester, a general partner at Azure Capital Partners. “The bar is very high now for the IPO market, but the thing that I think is different now is there are [venture-backed] companies of scale.”

IPO Redux

Overall, 11 venture-backed companies went public in 2009 as of mid-December, raising $1.6 billion, according to Thomson Reuters (publisher of VCJ). That compares to six venture-backed companies that raised $471 million in 2008.

Of the 11 startups that went public in 2009, the three best performers were SolarWinds (up 67% from its IPO price as of Dec. 11), Bridgepoint Education (56%) and OpenTable (38%).

The three worst performers of the year were Omeros (down 29% from its IPO price as of Dec. 11), Cumberland Pharmaceuticals (down 19%) and Echo Global Logistics (down nearly 5%).

The biggest winner in a VC-backed IPO last year was Warburg Pincus, which held 34.6 million shares of Bridgepoint Education worth more than $565 million on Dec. 11. Rounding out the top five big winners were Insight Venture Partners, with 17.4 million shares of SolarWinds worth more than $364 million; Morgan Stanley, with 14.3 million shares of DigitalGlobe worth about $331 million; Bain Capital, with 14 million shares of SolarWinds worth $294 million; and North Bridge Venture Partners, with 8.8 million shares of A123 Systems worth $162 million. (Note the calculations didn’t take into account any shares sold at the time of the IPO.)

In the biggest payday of the year for VCs, Cisco agreed to pay $2.9 billion for Starent Networks, which had gone public in 2007. Three VC firms remained significant Starent shareholders after the IPO: Highland Capital Partners, Matrix Partners and North Bridge Venture Partners. For their long-term vision, the VCs were rewarded with a total of $780 million for their shares. North Bridge was the biggest winner, with a 15% stake in Starent worth $369 million.


New IPO filings made in the past two months are heavily weighted to the Internet and technology sectors, with several registrations from companies that first raised venture capital more than a decade ago:

Financial Engines, a Palo Alto, Calif.-based provider of investment advice and portfolio management services, filed for a $100 million offering. The company has raised $139 million in venture funding since 1996 from more than a dozen investors. Currently, Foundation Capital, New Enterprise Associates (NEA) and Oak Hill Capital Management own 17%, 14% and 9%, respectively.

QuinStreet, a provider of online direct marketing services, filed for a $250 million IPO. The Foster City, Calif.-based company, founded in 1999, has raised $59 million to date. Venture backers with stakes of 5% or more in the company include Catterton Partners, GGV Capital, Partech International, Split Rock Partners, Sutter Hill Ventures and W. Capital Partners.

•And SPS Commerce, a developer of supply chain management software for e-commerce companies, filed for a $46 million IPO in December. The Minneapolis-based company has raised $71.5 million since 1997 from backers including Adams Street Partners, Granite Capital Partners, River Cities Capital Funds and St. Paul Venture Capital.

In the last two quarters [of 2009] there has been more emphasis than I’ve seen in the last couple of years on companies preparing for a public offering.”

T. Hale Boggs

Feeling Chipper

Semiconductor companies are apparently also feeling secure enough to test the IPO waters. Two have filed to go public since November. Telegent Systems, a Sunnyvale, Calif.-based fabless semiconductor company that develops chips for mobile television, is looking to raise $250 million in its offering. Founded in 2004, Telegent has raised $49 million in venture funding from backers including Index Ventures, NEA, Northern Light Venture Capital and Walden International.

Another chipmaker hoping to make a public debut is MaxLinear. The developer of integrated circuits for use in consumer electronics filed for a $100 million IPO. The Carlsbad, Calif.-based company has raised $28 million from U.S. Venture Partners.

The lone life sciences filer, meanwhile, was Trius Therapeutics. The San Diego-based company, which develops antibiotics, is looking to raise $86 million in its IPO. It has raised $50 million since 2006 from backers including InterWest Partners, Kleiner Perkins Caufield & Byers, Prism VentureWorks, Seraphim Partners, Sofinnova Ventures, Tech Coast Angels and Versant Ventures,

Prospective IPO candidates are apparently taking encouragement from the fact that, even though few companies have gone public in recent months, those that have made it out have fared relatively well. As a group, the 11 companies that went public in 2009 were trading 17% above their IPO price as of the start of December, according to Thomson Reuters.

Network security provider Fortinet provided a solid, if long-awaited, return for venture bankers with its mid-November IPO. The Sunnyvale, Calif.-based company raised $156 million through the offering, pricing shares a bit above their anticipated range. As of mid-December, shares were trading around $17, up substantially from their initial offer price of $12.50, giving the company a market cap of $1.09 billion. Fortinet previously raised $84 million in venture funding. At the time of its IPO, the largest venture backers were Redpoint Ventures, with a 12% stake, and Meritech Capital, with a 9% stake.

Far from Normal

While the past year showed improvement, the sad reality is that the number and proceeds of VC-backed IPOs for 2009 were far below historical levels, according to VCJ’s analysis of Thomson Reuters’ IPO data. From 2001 to 2009, the average annual number of venture-backed offerings was 45 and the median number was 41, while average annual proceeds totaled $4.5 billion and median annual proceeds totaled $3.5 billion. (VCJ purposefully excluded data from 2000 because it was an extraordinary year.)

Last year looks even worse when compared to the new issues market of the 1990s. From 1990 to 1998, the average and median number of VC-backed IPOs per year was 167, while average annual proceeds totaled $5.9 billion and median annual proceeds totaled $4.9 billion. (VCJ purposefully excluded data from 1999 because it was an extraordinary year.)

Some believe that the VC-backed IPO market won’t return to historical levels without some kind of structural changes, such as government tax incentives and relaxed regulations. Until (or unless) those changes occur, we may have to be satisfied with more years like the last one.

Others argue that although pre-IPO companies and their backers would certainly like to see such reforms, they’re not willing to let regulatory burdens stand in the way of a public offering.

“It’s still a deal-killer for some,” says Boggs, of the costs and regulatory burdens of orchestrating an IPO. “But companies that have an inclination to go public have made a decision to go forward, Sarbanes-Oxley notwithstanding.”

Lawrence Aragon conributed to this story.

Optimism for Health Care IPOs

Health care companies are lining up to go public, and they could get a warmer reception in 2010 as investors’ risk appetite increases, and new legislation potentially leads to more profit for the sector.

There’s going to be a good IPO market for the next six to nine months because there are so many good [venture-backed] companies that have grown to scale.”

Cameron Lester

The U.S. Senate on Dec. 24 approved President Barack Obama’s health care reform bill. It must negotiate with the House of Representatives over a final version, but if the bill passes, it would provide additional money to health care companies.

New legislation will not immediately translate into more health care IPOs, experts cautioned, but added it would generally boost the sector, and the pipeline looks healthy.

“It will be three to five years before you start seeing significant uptick in the number of companies that are coming to the public market due to the Obama health care plan,” says Benjamin Howe, chief executive at investment bank America’s Growth Capital.

Still, a recovering economy and hopes of money in a few years could be helping companies go public now.

Global heads of equity capital markets from Bank of America Merrill Lynch and UBS in December identified health care as one of the sectors that they expect to produce more IPOs in 2010.

“People are more comfortable with risk if they see growth or the potential for growth,” says Nick Einhorn, a research analyst with Connecticut-based Renaissance Capital.

That greater appetite for risk taking could spur investors to buy shares in newer health care companies, whose products may be further away from receiving regulatory approval and with less of a track record in making money, Einhorn says.

Health care spending currently accounts for about 11.5% of the U.S. economic activity, as measured by personal health-care expenditure figures in the most recent gross domestic product report.

That percentage is expected to grow if the government succeeds in shaking up the industry by extending coverage to more than 30 million uninsured Americans, stopping companies from refusing insurance to people with pre-existing conditions, and providing some government subsidies to pay for all of it.

No Sure Thing

Einhorn cautions, however, that there is no guarantee portfolio managers will want to take much more risk in 2010, and health care is among the riskier sectors for IPO investors.

Health care companies such as central nervous system anti-inflammation drug maker Omeros Corp. and Chinese radiotherapy and medical imaging company, Concord Medical Services Holding Ltd., both lost roughly 13% of their value in first-day trades earlier this year, and have traded lower since.

But some health care IPOs performed well in 2009. Protein therapy company Talecris Biotherapeutics Holdings Corp. had the most successful health care IPO of 2009, raising $950 million and gaining 11.3% in its first day of trading.

The company had initially planned to go public, but canceled when Australian blood products group CSL Ltd. offered to buy it for $3.1 billion. It turned back to public equity when U.S. antitrust regulators blocked the deal. —Clare Baldwin, Reuters