Venture-backed Companies Line up their IPOs

I still see too many entrepreneurs who believe that the U.S. capital markets will never again roll red carpet for venture-backed technology companies. Guess what? Markets have always been cyclical and things are turning around, particularly for the venture-backed technology companies. Witness the recent filings of New England companies founded by TiECon members including Airvana, BladeLogic, Netezza, Virtusa, and Starent.

Venture-backed technology IPOs came back in vogue in the latter half of 2006 and produced good market returns (difference in the first-day closing and the offering price,) signaling that the public is showing more appetite for technology companies than before. As a group, technology IPOs posted a very impressive 37% average return from the offer price. Notable tech IPOs this year include Mellanox (Infiniband interconnect, rev. $44M,) Clearwire (WiMax network, rev. $95M,) Sourcefire (network protection, revenue $41M,) Salary.com (rev. $17M,) BigBand Networks (video network, rev. $140M,) Glu Mobile (games for handsets, rev. $39M,) Comverge (power management, rev. $24M,) EnerNOC (power response management, rev. $23M,) and Aruba Networks (enterprise wireless, rev. $73M.)

Revival of the Capital Markets: The capital markets have been on a bullish streak. The Dow Jones index surpassed its previous peak reached in 2000 late last year while S&P 500 is almost back to its closing record of 1,527 of March 2000. But the Nasdaq Composite Index, which is dominated by technology stocks and lost the most of any major index in the bear market, would have to nearly double to return to its old record of 5,048 of March 2000 - a sign that the technology investors are optimistic and rational, not overzealous and speculative.

The IPO market experienced the best first quarter since 2000 in terms of volume and proceeds. Overall, IPO offer amounts by venture-backed companies dropped to about $2B in 2002 and then slowly climbed back to $5.2B last year. We expect that this year will be a particularly strong year, easily outpacing the amount raised last year. The total number of Nasdaq IPOs for the first quarter, 42, was the most since the same period seven years ago.

Healthcare and IT: 2006 was a good year for the healthcare sector. However, most of these listings were priced below their ranges. Technology and telecom companies accounted for about 22% of the IPOs and produced good market returns. Riverbed Technologies, a WAN optimization vendor, was the top performing IPO, producing 215% return. Other solid performers included Ominture (web analytics,) Isilon (clustered storage systems,) Techwell (fabless IC designer,) and Synchronoss (VoIP software.)

Alternative Energy IPOs: Solar Shines
As the buzz surrounding solar investments peaked, a quartet of solar power products manufacturers raised $822 million in proceeds. The notables included Canadian Solar (+35%), Trina Solar (+2%) and Solarfun Power (-20%) that pitched China-based operations. First Solar (+39%) is very active in Germany, the second largest solar market in the world.

While Ethanol Runs Out of Fuel: Used as a fuel additive since the 1930’s, ethanol’s recent rise to prominence has been fueled by a favorable regulatory environment and the phase-out of competing fuel additive MTBE. While market conditions appeared ripe, investors were concerned about long-term viability. After strong initial trading, VeraSun and Aventine both plummeted amid concerns over narrowing ethanol spreads. Similar concerns led Hawkeye Holdings to pull its planned IPO in November and forced U.S. BioEnergy to price its offering at a -13% discount, according to IPOHome.

VC Firms optimistic: The venture firms in Boston and Silicon Valley have a clear sense that this is a very viable market for technology companies. 2007 should be a big year for venture-funded tech companies. I expect VC-backed technology and internet-based companies to continue their IPO revival in 2007 as many companies that got off the ground in the aftermath of the tech meltdown are now maturing. Proposed changes loosening the burden of Sarbanes-Oxley (SOX) should also entice more technology IPOs where such costs can take a large bite out of their profit margins before their business models reach full scale. We do see segments of the technology sector strengthening their presence in the IPO pipeline on a sustained basis. These include cleantech, mobility, and multimedia applications and infrastructure.

How do you view the future of venture-backed technology companies in the U.S.?