If only it could have phoned home for help. Alien Technology Corp., a VC-backed maker of RFID products, yanked its proposed $138 million IPO in August in light of a dismal IPO market.
The market is getting downright scary. The average aftermarket performance for VC-backed IPOs this year was -7.65% as of the market close on Aug. 8. That is significantly worse that the -2% mark for all U.S. IPOs this year, and worse than either the Dow Jones Industrial Average or Nasdaq, which clocked in with aftermarket performances of 4.7% and -6.5%, respectively.
For VC-backed companies, the challenges of pricing are compounded by a steady drumbeat of risk aversion. Thomson Financial (publisher of VCJ) reports that the best-performing U.S. IPOs in 2006 came from asset-heavy sectors, such as retail, industrials and materials. Venture capitalists, however, tend to prefer the industries that have performed the worst so far this year, which include telecom and health care. The potential for risk was great with Alien, since the market for RFID tags is not as mainstream as the company’s backers would hope. Plus, Alien—which had raised about $229 million in VC funding since its 1999 inception, from such firms as Advanced Equities, Sevin Rosen Funds, New Enterprise Associates, Rho Ventures and CMEA Ventures—had posted a loss of about $63 million last year, based on sales of about $19 million, according to its prospectus.
Just one VC-backed IPO made it out in July, Cleveland Biolabs, and it may have wished it hadn’t gone public. It priced at the low end of its range of $6 to $8, then closed at $5.30 on its first day of trading. The maker of drugs to treat radiation exposure didn’t even get a lift from the news of an averted terrorist attack: Its shares were trading at $4.60 on Aug. 14. It was hammered by Wall Street because it has been losing money for three years in a row and its annual revenue is barely more than $ 1 million.
VC-backed IPOs in 2006 are even underperforming LBO-backed offerings (-2.06%), despite that sector’s rampant pre-offering profit-taking. Some of this can be pinned on particularly bad aftermarket performers, such as Vonage Holdings Corp. and Iomai Corp., but more of it is due to larger market forces that are simply hostile to VC-type companies.—Dan Primack/Lawrence Aragon