Back to insights

IPO – Something to Watch

Nate Lentz
April 25, 2011

I got an email from a friend the other day offering me “friends and family” stock for an upcoming IPO.   Frankly, I thought they did away with this tradition after some of the scandals in the internet bubble period.   I was very pleased to make the list.   It also got me thinking.

This friend is about to complete a long awaited public offering.  Last week another friend and former work colleague who had worked for Flex-car which became Zip-car benefitted from a strong IPO.  Last month, our sister fund, Osage University Partners, had a portfolio company, Gevo, complete an IPO.   When is the last time I have been within a couple degrees of separation from three IPOs in less than three months?   It would have to be back when I was in San Francisco in 1998 or 1999.

According to VCJ magazine, there were 12 venture-backed IPOs in January and February of 2011 compared to 2 for the same period in 2010, 0 in 2009, and 4 in 2008.  For the last three years, the venture-backed IPO market has seen a rapid acceleration – 6 in 2008, 12 in 2009, 72 in 2010 (with 32 in the final quarter.)  All indications are that 2011 will blow away 2010.

I don’t know what this all means to the local early-stage VC market in the mid-Atlantic region but there are a number of things I am going to begin to watch:

  • The number of IPOs being completed by quarter and the sectors represented.  I am particularly interested in the enterprise technology sector versus some of the “hot sectors” such as Web2.0 or social networking.
  • The average trailing 12 month revenue of the companies having IPOs and the level of profitability or loss of the companies entering the public markets.   This will tell us  a lot about how many of our investments are within the reach of an IPO option
  • The post-IPO performance of these recent IPOs.  As of 12/31/10, the 2010 IPOs were up 38% on average.  That’s a pretty good number.  This means companies are performing, are deploying their new capital effectively, and are likely in a position to access more capital if necessary.   It also encourages other CEOs to try the public route.
  • Who are emerging as the “horsemen” of the new IPO trends?  These are the people our most successful CEOs and companies need to know and who we need to know.
  • The impact of a vibrant IPO market on the exit multiples of M&A transactions and if the IPO market is driving longer or shorter exits for investors.

I am going to exclude the Facebook’s, the LinkedIn’s. the Groupon’s from my consideration.  I will also exclude the clean-tech pre-revenue IPOs.  These may be huge, they may be bubbles, but either way, they will skew the analysis.   My interest lies in the mundane IPO data that sits within two standard deviations of the mean.   Frankly, the IPOs which the popular press does not cover are the ones which drive the economics of the industry.  This is not some sort of reverse snobbism.  It is simply that these more grounded sectors are where we invest at Osage

Having been a CEO of a public company for five years, I can speak at length of some of the challenges of being public, especially when the institutional market has moved on and the retail market drives your destiny.  Yet I have to say that the whole thought of the IPO and what it means for those involved remains for me a very exciting investment outcome and the increase in these events bodes well for all exits, public and private.

I look forward to collecting the data above and seeing what it tells me.