The numbers underscore just how bleak is the IPO market
By Beth Healy, 4/8/2002
Venture capitalists hardly ever talk about IPOs any more. They can barely remember what a public offering is.
It's been two years since Nasdaq imploded, and there's been little room for optimism about stock offerings ever since. Two years: That was a lifetime in the feverish Internet days. Vast fortunes were made in less time - and lost even more quickly a bit later.
The numbers show just how bleak things have been for companies looking to go public: Only 13 IPOs have been launched this year, four of those with venture backing, according to a quarterly study by Venture Economics and the National Venture Capital Association.
At that rate, 2002 could fall far short of last year's anemic activity, when 110 companies sold stock for the first time, 37 of them venture-backed start-ups. To put this in context, recall that there were 351 IPOs in 2000, 508 in 1999, and 771 in 1996.
''While it looks to be breathing, there are no sure signs of life in the IPO market yet,'' observes Jesse Reyes, vice president at Venture Economics.
The largest venture-backed IPO of the quarter wasn't even a technology company. It was WCI Communities, a Florida-based builder of planned communities that raised $131 million in its stock sale. The other three were more classic venture plays, including PayPal, a payment service for eBay and other Web sites; Zymogenetics, a Seattle biotech company; and Synaptics, a San Jose, Calif., maker of software and devices for mobile computers.
Interestingly, three of the four stocks are trading above their offering price. PayPal, which went off in February as a mini-sensation (the one-day return of the Internet IPO) is up 40 percent. Synaptics has soared 70 percent, and WCI has gained 32 percent. Even Zymogenetics, which has been less lucky, is off its $12 IPO price by less than $1.
Those early results seem to back up what VCs have been saying for more than a year now - that the companies that do manage to go public in this more demanding environment will be healthier than the last crop. That means they stand a chance to be better investments for the ordinary folks who get stuck with the stock when the VCs get their so-called exits.
Don't forget who holds stock after the venture firms sell: Mutual funds, pension funds, and do-it-yourself investors. If you'd purchased shares of every venture-backed IPO that hit the market over the past three years, you'd have lost 15 percent a year, according to the study. That's worse than Nasdaq's 9 percent average annual decline over that period and the Standard & Poor's 500 Index's 3.7 percent loss.
Time is supposed to cure all ills in investing, but it hasn't done much for those venture-backed IPO returns. All the VC-backed start-ups that went public over the past five years have together delivered a 0.3 percent average annual loss. Money invested in the Nasdaq Composite index instead would have gained 5.8 percent a year. More embarrassing still: Those stodgy giants of the Dow provided an 8 percent yearly gain. Even over 10 years, the venture-backed IPOs underperformed the other indexes.
Venture Economics blames the poor venture-backed IPO performance on the market's dive in 2000 and 2001. But that's little solace to anybody who owned those stocks.
VCs still depend on the IPO market's eventual resuscitation. They can't necessarily find buyers for all of the companies in their portfolios, nor would they want to. Lots of venture firms have racked up strong returns over the years by first taking start-ups public and then seeing the companies acquired - netting the VCs a double whammy.
Many stock pros say the overall market won't recover until the technology sector gets out of the dumps. For high-tech companies to sell more products and earn more, the economy has to improve. Therein lies the waiting game. If early signs are correct that the economy is gaining strength, Reyes predicts, ''there should be some favorable exits for the venture industry.''
Count Charles River Ventures among the firms lining up to say they're trimming back giant VC funds.
Charles River partner Ted Dintersmith told the Wall Street Journal last week that the Waltham firm would likely cut its $1.2 billion fund in half.
Venture investors and analysts have been predicting that peer pressure to slash big funds would come this way after hitting the West Coast first. Silicon Valley's famous Kleiner Perkins Caufield & Byers recently announced plans to cut its fund. So did Redpoint Ventures, Mohr Davidow Ventures, and Accel Partners.
Beth Healy can be reached at bhealy@globe.com.
This story ran on page C3 of the Boston Globe on 4/8/2002.
© Copyright 2002 Globe Newspaper Company. |
