We Don't Need No Stinking IPOs!

Startups are spurning the markets in favor of independence

If this were 1999, David Krell would have bankers pounding down his door. His online stock-option trading site, International Securities Exchange Inc., turned its first profit in the fourth quarter and is on track for 20% pretax profit margins on more than $50 million in sales this year. But when Krell wanted to raise $25 million this month, he didn't think about an initial public offering: He hit up his private backers instead. "I'm not sure when--or if--we'll do an IPO," he says.

The reason the tech IPO market is quiet may be different than you think. After all, investors seem game. On May 23, online DVD-rental service Netflix Inc. (NFLX ) jumped 12%, to $16.75, in its first day of trading. But don't expect a lot of other Web companies to follow Netflix's lead. Instead, the market is being held back by an unexpected source: Companies that don't want to go public. Exactly how many profitable Web companies are sitting tight is hard to say. Checks with venture-capital firms and big-name startups turn up at least a dozen, in fields as diverse as online search and travel, auctions, and network storage devices. Even some e-tailers, such as luggage seller eBags Inc. and high-end crafts site Guild.com, say they've turned at least cash-flow positive but have no plans for an IPO.

Companies are deciding they don't want to risk what happened to the IPO class of 1999--going out too soon and getting whacked. They're waiting to have longer track records so that they, as well as Wall Street, can predict their businesses better. "If you miss a quarter by a penny, you're toast," says Greg Strakosch, CEO of two-year-old online-newsletter startup TechTarget, which expects to turn profitable this quarter. Says Marc Benioff, CEO of privately held Salesforce.com: "A lot of public companies wish they weren't."

The fact is, privately held Net companies have learned to be frugal and have found ways to grow without IPO cash. Travel site Hotwire Inc., for example, spent about 12% as much on advertising as its rival, publicly held Priceline.com Inc. (PCLN )--even though it's now half the size, says Hotwire CEO Karl Peterson. It stretches its ad dollar by buying Internet and radio spots instead of TV time.

And the drop-off in e-commerce and new media startups since 1999 means that many companies now turning the corner on profitability aren't hearing the footsteps of other dot-coms behind them. That's why eBags CEO Jon Nordmark is in no rush to take his e-store public, and why online purchasing exchange ICG Commerce is achieving profitability sooner by paring back its international expansion. "Get big fast" is no longer the rallying cry. "We're going to see that maybe it's the second mouse that gets the cheese," says Hotwire's Peterson.

Saying no to an IPO--at least, for now--won't slow the pace of innovation. Indeed, some CEOs argue that going public would make them less creative. They don't want to be chained to budgets they've shared with Wall Street, and they don't want the scrutiny of a risk-averse market if they try to grab new opportunities. With analysts looking over his shoulder, Peterson says he would have thought twice about boosting April's marketing budget by 20% to promote his site during an airline fare war--a move he says sent revenue sailing 40%. TechTarget's Strakosch launched a print magazine about computer storage in April, which Wall Street analysts would have knocked because of tech's ad slump. "It will build a huge franchise. But if we were public, we would have waited," he says.

Salesforce.com's Benioff would love to go public but says institutional investors tell him he'd be crazy to do it. So, it will be at least late this year before the trickle of deals like Netflix turns into a stream--let alone a flood.

By Timothy J. Mullaney in New York

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