Looking for a Venture, Net IPOs Turn to Investing Public for Cash

With many soon-to-be-public Internet companies facing a shortage of cash, some analysts see the public as taking on the role of venture capitalist.
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If investors lose their appetite for Internet IPOs, some companies now planning to go public may have to make quick decisions about alternative sources of capital.

At least four Net companies nearing their IPOs have less than six months' cash on hand to cover what they're spending on operations and start-up costs, according to recent

SEC

filings examined by

TheStreet.com

.

The trend is one more indication that some of the Internet companies heading public now would still be seeking venture-stage investments if times were different, according to some Wall Streeters. Going public with a minimal cash cushion is bound to raise tough questions about why companies haven't raised more money privately, says one venture capitalist.

And a delayed IPO could be a real possibility for Internet stocks, given the weak performance of recently public Net stocks. Last week, for example, six companies, including high-speed-access company

DSL.net

and software firm

Braun Consulting

, delayed their IPOs, though not all blamed market conditions.

If these companies can't raise money through an IPO, they may have to raise it elsewhere soon. For example,

Loislaw.com

, a Van Buren, Ark.-based company that provides legal information to lawyers over the Internet and on CD-ROMs, had $3.3 million on hand as of June 30. That was equivalent to three months' worth of cash, based on what it used up in operations in the first half of the year, according to its latest IPO documents. That spending doesn't include the cash Loislaw.com invested in its database, property and equipment, which it reported separately; if Loislaw.com kept on spending at the same rate for the second half of the year, the company then only had about 1 1/2 months' worth of cash on hand.

Other firms going into their IPOs with less than six months of cash include e-commerce software company

InterWorld

, business-to-business e-commerce marketplace developer

PurchasePro.com

and email direct marketer

yesmail.com

.

In comparison, other Net companies large and small have gone out with greater cash cushions. Before Latin American portal

StarMedia Network

(STRM) - Get Report

went public recently, it had enough cash to cover a year and a half of spending. On the eve of online video retailer

BigStar Entertainment's

(BGST)

IPO, it had enough cash for a year. And way back in May 1997, when

Amazon.com

(AMZN) - Get Report

went public, the bookseller wasn't even losing cash, unlike all these other companies; its cash from operations actually grew during the first quarter of that year.

To go public without a comfortable cash position isn't necessarily bad news, says Steve Brotman, managing partner of New York-based venture capital firm

Silicon Alley Venture Partners

. Brotman says he pays more attention to whether companies going public have been able to raise successively larger rounds of capital from their private investors.

But having a small amount of cash is bound to raise difficult questions among potential IPO investors, he says. They're likely to ask why a company didn't raise another round of private money from its venture capital investors. "Why wouldn't you want to cover your bases so people won't ask that question?" says Brotman, who was formerly CEO of privately held Internet classifieds company

AdOne Classified Network

. Potential investors might ask, "Is this the last gasp for cash?" says Brotman. "You want to squash that."

The public markets will likely not think well of a company if they believe it is desperate for money, Brotman says. "Traditionally, companies that have had to go public or they would go out of business have been lousy investments," he says.

If companies are rushing public earlier and with less cash on hand, that suggests that public-market investing is getting as risky as private-market investments, says Steven Schuster, partner in hedge fund

Gemina Capital Management

. "The public is taking on the role of venture capitalists," he says.

"In generic terms, two quarters of cash on hand sucks," says Schuster, though he adds that the pedigree of management and backers is more important than cash on hand in pre-IPO investing. "The balance sheet should give you some comfort that there's enough skin in the game -- that it's not only my money keeping this afloat. You'd like to see there's plenty of cash in the coffers keeping this thing afloat," he says.

Of course, once a company is able to go public as planned, the amount of pre-IPO cash may be moot. If, for example, Loislaw.com raises the $75 million it hopes to raise from selling stock to the public, then it would have more than five years of cash on hand to cover its current negative operating cash flows.

And one former Wall Street analyst, now running an Internet start-up, says one shouldn't conclude that these companies are in trouble, or can't raise money elsewhere. "While the health of the IPO market may be weakening ... there's still a significant amount of venture money out there," says the former analyst. If companies have to wait six months to go public, says the source, management will be able to raise more money through an additional private financing: "It's not the end of the company. It just means the founders will only have one jet instead of two."