IPOs: A Modest Turn Around the Corner

Sam Colella remembers the exact day the initial public offering market fell apart. The venture capitalist and chairman of the biotech company Fluidigm was in Switzerland in September 2008 when the company's investment banker called to say Lehman Brothers had failed. So unnerved was the banker, who worked for Morgan Stanley, that he stuttered out the news. Days later, Fluidigm canceled its offering, setting off the longest IPO drought for startups in 40 years.

That drought is ending. The number of startup companies going public in the upcoming year is expected to increase substantially from the 13 offerings in 2009, although the precise number is a matter of much debate. Venture capitalists predict offerings will double, to 26, according to a survey by the National Venture Capital Assn. of 325 members. Other experts believe the number may go beyond 50. "You could see 80 to 90 [companies] spend the million dollars to file, and north of 50 go public," says Tony Perkins, founder of tech conference promoter AlwaysOn Network. Fluidigm plans to be one of them, since Colella thinks investors are ready to take risks again.

Sandy Miller, a partner at Institutional Venture Partners in Menlo Park, Calif., says the number of profitable, private technology companies is probably at or near a record. Partners at IVP, New Enterprise Associates (NEA), and other VC firms say they have five or six viable candidates each, most with $100 million in annual sales or more. "These companies are 7 to 10 years old, and they've passed the test of the economy," says Dick Kramlich, a co-founder of NEA in Menlo Park.

Skeptics counter that no one really knows whether investors are ready to open their wallets for fledgling companies. Deepak Kamra, a partner at Canaan Partners, points out that VCs have done little research into whether institutional investors want more stock in startups. "We know about supply, but not about demand," he says. Kamra says investors' appetite for risk will depend in large part on the overall stock market. "Tell me how the Nasdaq does and I'll tell you how many IPOs," he says.

Over the last two months, 16 companies have filed to go public. They include two well-known cleantech companies, solar panel maker Solyndra and Codexis, which makes enzymes for cellulosic ethanol. QuinStreet and ReachLocal, fast-growing and profitable Web advertising companies, have also filed offering documents with the Securities & Exchange Commission. Sunnyvale (Calif.)-based Telegent Systems, which makes chips to deliver TV service on mobile phone, may be one of the bigger offerings, after filing to raise as much as $250 million.

Next year is also likely to include offerings by several marquee names. Facebook and Twitter are IPO candidates for 2010. Electric car maker Tesla may try to go public. And Silver Spring Networks, which develops smart grid technology for utilities, could test investors' interest, though Warren Jenson, chief financial officer for Silver Spring, says the company is in "no hurry" to go public.

Still, the recovery will be far from a new boom. A market with 26 deals, as the NVCA survey predicted, would resemble the depths of the Internet bust earlier this decade. The 22 startup deals in 2002 and 29 in 2003 were the bottom of the post-bubble market, according to the association. "It's higher than we've had, but still pretty abysmal," says Mark G. Heesen, president of the NVCA.

The real recovery for IPOs may have to wait until 2011. NEA partner Scott Sandell believes investors want to have a better understanding of the economic recovery and companies' ability to manage through tough times before they make big bets on startups. "If the market stays open until 2011, the numbers will go up a lot," says Sandell. "A lot more [companies] will be ready."

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