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Tech IPOs Are Clicking Again

By Olga Kharif Jon Nordmark, chief executive of online retailer, recalls all too well the lean years following the burst of the dot-com bubble and terrorist attacks of September 11, 2001. Funding sources dried up, and the investment bankers once eager to push deals were nowhere to be seen. "We went two years without anybody calling," he says.

At one point, Nordmark worried the business would get low on cash and have to close shop. But, the world's largest seller of bags and accessories over the Internet, persevered. And unlike hundreds of its peers, the Denver company achieved profitability on its own. These days investment bankers are calling all the time, says Nordmark. Their burning question: When can we take your company public?

ROOMBA WITH A VIEW. Dealmakers are reaching out to a lot of other private technology companies of late. After a lull in the first half of 2005, the tech IPO market boomed in the typically slow month of August. Last month saw 30 initial share sales raise almost $5.6 billion, making it the busiest August for U.S. IPOs in five years, says Michael Moe, CEO of investment bank ThinkEquity Partners.

Whereas investors a year ago were demanding massive price discounts and assurances of profitability, nowadays they're more willing to gamble. About one-fourth of the month's offerings were small-cap companies, tech and nontech, generating less than $200 million in annual revenue, and many were relatively new.

Specialty online retailer Ritz Interactive, which filed to go public on Sept. 9, had $20 million in sales in the prior 12 months. iRobot, maker of the robotic Roomba vacuum, filed to go public in July. The company, which has yet to set a date for its initial share sale, is unprofitable.

NO WORRIES. Why the resurgence in risk tolerance? "Investors are starved for growth and innovation and new ideas," Moe says. "If you want performance, you are not going to get it out of the S&P 500."

It doesn't hurt that the U.S. economy is showing signs of strength and that technology stocks are on the rise. The Nasdaq has gained about 6% since the beginning of July, and for now, many investors are shrugging off the effects of rising interest rates, oil prices, and the fallout from Hurricane Katrina.

Technology IPOs -- which often carry both the greatest risks and highest returns -- are particularly in vogue. Today about 13% of the IPO backlog is made up of tech outfits, making the industry one of the top three IPO sectors. Three of the seven IPOs filed this month are information technology-related, according to Renaissance Capital's researcher, "It's like tech companies were on probation for several years," says Tom Taulli, an analyst at investment bank Instream Partners.

EYES ON VONAGE. Investors are on the hunt for the next (AMZN), eBay (EBAY), or Cisco (CSCO). And for now the probation period is over.

The hottest fields include Web-based calling, robotics, social networking, and -- you guessed it, the Internet.

Vonage, the leading provider of Voice over Internet Protocol (VoIP) services, is expected to file to go public in the next two months, though the company is mum on the subject (see BW Online, 9/12/05, "Vonage: The Growing Sound of Static". "It'll be a good lift for the industry," says Jeff Pulver, a Web-calling pioneer who owns a piece of Vonage. Pulver, whose pulvermedia puts together the VoIP industry's largest show, VON, says he might consider taking his company public a year from now. Some of Vonage's 1,100 North American VoIP rivals might follow suit.

DOWN THE ROAD. Among those, the most high-profile is Skype, responsible for 46.2% of VoIP minutes used in North America, according to a survey done by networking-equipment maker Sandvine. Luxembourg-based Skype is said to be in talks to be bought by online auctioneer eBay, though the company prefers to stay independent, says Tim Draper, whose venture-capital firm Draper Fisher Jurvetson is among Skype's backers. Analysts say an IPO would be a better way for Skype to fund its exponential growth (see BW Online, 9/9/05, "Skype Can Play Hard to Get").

Tellme, a maker of VoIP- and wireless-related software, may also go public. Tellme, which develops products that make phones and the Internet work together, says 35 million people use its services each month. The software maker generates $100 million in sales and is profitable. It aims to double the number of unique visitors to its site in the next year by offering applications that carry out a slew of tasks, such as finding a restaurant by using a mobile phone and then quickly placing an order. "Our intention is to take the company public at some point," says CEO Mike McCue, who declined to say when.

Other Internet-based businesses may also find willing buyers. In July media mogul Rupert Murdoch paid $580 million for Intermix Media, owner of social networking site, generating interest in other networking sites (see BW Online, 8/16/05, "The Birth of").

FOLLOW THE LEADER. An IPO candidate is Facebook, a directory of students from more than 2,000 colleges and high schools. Relying solely on advertising, the company is profitable, and sales are rising, says a spokesperson. "In the course of Facebook's existence, it will most likely either be acquired or conduct an IPO," the spokesperson says. "Everything is on the table at this point."

Chinese Web-search engine may follow in the footsteps of rival (BIDU), which made its blockbuster public debut in August. "is almost guaranteed to file in the next six months," notes Taulli. Says a company spokesman: "We have no plans to [go] public anytime soon."

Some tech startups want to see how the likes of Vonage fare before entering the IPO fray. Others say their businesses first need to get bigger or develop track records. "The environment is sufficiently demanding and skeptical that you don't want to bring a company out until you can see its growth two or three years out," says Fabio Rosati, CEO of eLance, a provider of software and services that help businesses find and manage outside companies to handle tasks. He intends for eLance to file two IPOs, one for each of its business units, in 2007.

ALL SYSTEMS MAYBE. And some investors burnt by the technology meltdown remain leery. Still, many companies are prepared to jump into the IPO market now that it's heating up again. Nordmark's eBags is among them. "We are preparing in every way to go public, but that doesn't mean we go," he says. "Everything is lining up to do that, but it's really not a pressing thing."

Not every company can be so coy. And for now, IPO bankers -- along with swelling ranks of risk-tolerant investors -- couldn't be more pleased.

Kharif is a reporter for BusinessWeek Online based in Portland, Ore.

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