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."
A Better Crowd
There are currently 10 IPOs expected to price between now and September. Among them, eight were profitable in their most recently reported periods, according to company filings. (The exceptions are Maguire Properties and Integrated Alarm.) In the '90s, venture capitalists chased after investments with quick exit possibilities. "The whole idea was to get in and then get out with a premium," said Jeff Hirschkorn, a senior analyst at IPO Monitor. They also created volatility. "When investors figured out that venture capitalists were selling their stakes in a company, they figured it was a bad sign for the deal," said Hirschkorn. "And so, the stock would go down." A recent survey by Deloitte & Touche of venture capitalists concluded that some companies that in the past would have been ideal IPO candidates are instead shifting their business plans to position themselves for acquisition by larger players. Two-thirds of the respondents said they did not expect the return of a vigorous IPO market until 2005 or later. "Anyone looking to go public has got to have a good story," said Graham Watson, a managing director in corporate finance at Deloitte & Touche. "A lot more due diligence is being done these days."
Since May, almost a dozen companies have filed with the Securities and Exchange Commission to go public, however, reflecting optimism about the recent run-up in stocks.