As the IPO market shows its first signs of life in three years, one of its traditional constituents has been relegated to the sidelines: venture capital. While 65% of the IPOs sold between 1999 and 2000 had venture funding behind them, fewer than 25% of new issues were venture-backed last year, according to Thomson Venture Economics. The result, experts say, is that more mature companies are going public, making it the best time in a decade to buy IPOs for the long haul. "A lot of the venture-backed companies that went public in the late 1990s didn't make it," said Jesse Reyes, vice president of Thomson Venture Economics. In 1999 and 2000, only 10% of venture-funded companies going public were profitable. Over the past 18 months, that number increased to 50%. "Investors nowadays are not looking for potential winners. They want real winners," said Reyes. "There has been a move toward quality."
"The stock market is the biggest voting machine out there, and it is voting in favor of more IPOs," said Kathy Smith, an analyst at Renaissance Capital's IPOHome.com. Venture capital tends to lag the IPO market. "VC hit bottom in the early 1990s, just as the IPO market took off," said Smith. "That is what is happening again." According to Smith, that makes it an ideal time to be an investor in IPOs. New issues priced this year are up 45% on average. But, as is often the case in successful investing, taking advantage requires ignoring conventional wisdom. With only eight deals sold so far, 2003 is on track to be the third consecutive year with fewer than 100 IPOs. The last time that happened was from 1977 to 1979, according to Thomson Financial, when there was high inflation, rising energy costs, and a war between the Soviet Union and Afghanistan. By contrast, 526 deals were sold in 1999. "The public is battle-torn and psychologically damaged," said David Menlow, president of IPOFinancial.com. "This is still a very recalcitrant market."
An example of the new breed of IPO is FormFactor ( FORM), a manufacturer of semiconductor testing equipment, which went public earlier this month. The company was profitable in its most recent quarter and the stock is up 25% since its debut. "The most shocking news has to be that there are technology companies out there that are profitable," said Menlow. "If we can get more like them, it is an unstoppable IPO combination." FormFactor is one of only three technology outfits -- the others being iPayment ( IPMT) and Telkom SA ( TKG) -- to go public this year. The sectors expected to see deals in the near future include technology, health care, insurance and real estate investment trusts, as companies take advantage of low mortgage rates. Other IPOs on the docket include REIT American Financial Realty Trust, due the week of June 23; managed care provider Molina Healthcare, expected the week of June 30; and insurance provider Axis Capital, also planned for the week of June 30. "Any activity in the IPO market will be skewed toward value for the investor," said Menlow.