Venture Capitalists Viewing Net IPO Shakeout
as a Return to Quality
By Spencer E. Ante
Staff Reporter
5/27/99 12:59 PM ET
SAN FRANCISCO -- Down on Sand Hill Road, Silicon Valley's venture
capitalists aren't bemoaning the lackluster demand for this month's Internet
IPOs. In fact, if the latest pullback serves to deter weaker IPO hopefuls
from consummating their plans to go public, venture capitalists are
applauding.
In their view, the frenzied IPO market in 1999 has allowed too many
immature or just plain dubious Internet enterprises to suck up precious
capital. And that's not good for anyone, VCs say, including the dogs that
get to see the light of day.
"Over the past few months, the screen has gotten much wider," says
Andrew Anker, a partner with August Capital, which manages two
tech-focused funds worth $300 million. "A lot more of the bad companies
have come out. If the screen tightens a bit more, then it could make it
harder for some of these bad companies to continue to come out."
To judge from Wednesday's dissing of new Internet offerings, the screen
does seem to be tightening. Two of the five Internet IPOs that began
trading Wednesday, Juno Online (JWEB:Nasdaq) and ZipLink
(ZIPL:Nasdaq) fell 11% and 12%, respectively, from their offering prices,
the first time two or more Internet IPOs closed below their offering prices
on their first trading day.
"We're hitting a crescendo right now," says Randall Roth, senior analyst at
Renaissance Capital. "The activity is enormous, and everyone's trying to
move product before the door slams shut."
As of Wednesday, 59 Internet companies had gone public in 1999, raising
$4 billion, according to Thomson Financial Securities Data. That
compares with nine offerings raising $511 million during the same period
last year. And the trend continues. Since March, 77 Internet companies
have filed for IPOs, up from 12 such deals filed in the same period in 1998.
"We already had an enormous backlog, and now there are more deals
coming," says Roth. "A lot more deals are going to be stuck in IPO
purgatory."
Jim Breyer, a managing partner with Accel Partners in Palo Alto, Calif.,
has also noticed a predilection among company directors of Net start-ups
for going public earlier. This trend troubles Breyer, whose firm manages
$800 million.
"This is an extremely dangerous perspective," argues Breyer, "because it
creates an enormous backlash against private companies that are of high
quality as well as public companies that are building high-quality
franchises, including companies like Yahoo! (YHOO:Nasdaq),
RealNetworks (RNWK:Nasdaq) and eBay (EBAY:Nasdaq)."
A particularly patient lot, VCs function like farm teams for capitalism,
nurturing start-ups for five to 10 years before cashing out in IPOs or
buyouts. In that sense, a VC can provide a useful perspective on the
health of adolescent companies that may or may not mature to become the
next eBay.
Despite the lackluster reception for some weaker IPOs, most VCs see
continued demand for the stronger Internet public offerings. "I think we'll
have a pretty good IPO environment moving through the fall," says Ruthann
Quindlen, a partner with Institutional Venture Partners, a VC firm
based in Menlo Park, Calif., that manages more than $1 billion.
Quindlen, who describes herself as "cautiously optimistic" about the IPO
market, says she continues to see a lot of good e-commerce deals come
across her desk, especially in the market for business-to-business
services. She is less bullish about investing in Internet tools,
semiconductors and enterprise-software firms.
The Internet Capital Vacuum
Venture-capital investments in Internet companies
Venture capitalists are increasingly tying their fates to Internet start-ups.
During the first quarter of 1999, Internet-centric companies received $2.1
billion out of $3.6 billion in venture funding, according to research firm
VentureOne. In the previous quarter, Net start-ups consumed $1.6 billion
of the $3.1 billion in venture capital invested.
So far, this quarter is looking even stronger. "There is still a perceived
great opportunity in the Net despite the volatility of the public markets,"
says Jean Yaremchuk, vice president of research for VentureOne.
Some venture capitalists, such as Breyer, are advising companies in their
portfolio to slow their entry to the public market until they achieve greater
visibility and a stable track record. Going public can create serious
problems for a start-up, says Breyer. Recruiting top-level management in a
post-IPO environment can be tough, as can shifting strategies once Wall
Street expectations are set.
Still, Accel has not shied away from taking its companies to market. Breyer
says four Accel-backed companies have gone public this month, and he
expects another four to come out by this summer. Several of the
companies Accel has brought public, including Redback Networks
(RBAK:Nasdaq) and Mpath Interactive (MPTH:Nasdaq), posted
spectacular first-day gains. But Breyer is not taking those performances
for granted.
"I can remember not too long ago when a 3- or 4-point gain was
considered a huge success," says Breyer. "We are in an insane period of
time where the expectations are utterly unrealistic." |
