Despite early optimism, VC-backed IPOs slow to launch

Just eight weeks ago, there seemed to be no doubt that the IPO market would be substantially more robust than last year.

Yet not only have several would-be issuers withdrawn their offerings, but six of the seven companies to go public this year are trading below their offering prices, and the lone public offering scheduled last week, venture-backed Anthera Pharmaceuticals, indefinitely postponed its IPO in the eleventh hour last week. Just two venture-backed companies made their debuts between January and late February.

How did things go south so quickly? The theories differ, depending on whom you ask.

Like many market watchers, Mark Heesen, the president of the National Venture Capital Association, believes the biggest problem right now is the underlying economy.

“At last year’s end, everyone thought the worst was behind us, but people are starting to reevaluate that,” he says. “You see the personal real estate market getting better, but suddenly commercial real estate looks ominous. You saw a steady market; now we’re seeing gyrations.”

Scott Sweet, managing director of the Tampa-based advisory firm IPOboutique.com, blames underwriters, saying he questions the “bizarre” choice of companies they’ve been bringing forward, including some that are severely debt laden, such as Graham Packaging, which makes plastic containers for consumer products.

The company, which went public the second week of February after cutting the size of its offering in half, “had over $2 billion in debt,” says Sweet. “Buyers don’t want debt-ridden companies right now.”

“It’s a tried-and-true adage that any IPO should have a stream of increasing revenue, decreasing losses, and/or increasing profits and low debts, and we’re not seeing that,” Sweet says.

For example, Anthera—which has raised $76.2 million in funding over the last five years from VantagePoint Venture Partners and Sofinnova Ventures, among others—has no revenue; it also doesn’t have drugs that have already been approved by regulators. The company had hoped to sell 4.6 million shares at $13 to $15 each.

Sweet also argues that bankers are pricing the deals too ambitiously. The only two venture-backed companies to get out the IPO door so far this year have had to slash their offering prices.

Internet advertiser QuinStreet had to price its stock at $15 after initially targeting $18 per share, according to regulatory filings. Shares of the company, which went public on Feb. 11, were trading at $13.60 as of late last week.

Drug maker Ironwood Pharmaceuticals also had to steeply discount its asking price before it debuted on Feb. 3, from between $14 and $16 to $11.25 per share. As of late last week, the shares were priced at $12.80.

QuinStreet, founded in 1999, had raised $51.9 million from Rosewood Capital, Sutter Hill Ventures and GGV Capital, among others. Ironwood Pharmaceuticals, formed in 1998, had raised $323 million from a long list of firms, including Venrock Associates, GGV Capital and Polaris Venture Partners.

The question now is whether there is still time for things to turn around. Though there are currently 37 venture-backed companies in registration, according to Heesen, “if in the next month or two here, you don’t see a significant uptick in registrations, you can pretty much say it will be a weak IPO year, since it takes many companies six months” between registering with the SEC and making their market debuts.

Terry Schallich, head of equity capital markets at the tech-focused investment bank Pacific Crest Securities, is choosing to stay optimistic.

Schallich estimates there are 58 deals “between the registered backlog and the shadow pipeline,” and while some are not yet ready, he says that most are “strong from a [profit and loss] perspective and growing at rates that resemble their growth rates in 2006 and 2007.”

Schallich attributes the market queasiness to geopolitics.

“Who would have thought that as Greece goes, so goes the rest of the world?” he says of Greece’s budget deficit problem.

He also says that the market will improve “over the next four to eight weeks.”

“I think all these macro concerns are causing people to wonder if we’re really on the other side of this recession,” he says. “We think the probability is weighted toward yes.” —Constance Loizos