IPO launching pad full, big Q4 expected

The IPO market may have slowed for VC-backed and PE-funded companies last quarter, but it’s roaring back to life as the backlog of companies in IPO registration continues to grow. In fact, the pipeline of pending deals is reaching proportions comparable to the dot-com boom 10 years ago, with venture-backed tech companies leading the surge.

More than 40 companies that have raised a round of venture funding in the last year are currently in registration to launch an IPO on a U.S. exchange, according to Thomson Financial (publisher of PE Week). The list includes several Internet and technology companies, such as employee performance-tracking software provider SuccessFactors, storage server company 3Par and nonprofit agency software provider Convio (see chart, pages 8 and 9).

“The big money and big demand is definitely leaning to tech,” says Scott Sweet, managing director of research firm IPO Boutique.

The estimated value of the backlog of IPOs stands at $28.1 billion, the highest level since 2000, according to data tracker Dealogic. The VC-backed portion of that is about $3.7 billion, according to PE Week’s analysis.

The number of VC-backed debuts rose in the second quarter as 25 VC-backed companies launched $4.3 billion in IPOs during the three-month period, according to Thomson Financial and the National Venture Capital Association. It was the most VC-backed IPOs in a quarter in the past three years. But the volume slacked off in the summer months as only 12 venture-backed companies raised about $950 million in the third quarter amid the normal seasonal drop off and a market downturn driven by credit industry turmoil.

Still, despite the lack of new issues, registrations are piling up. The volume of new tech sector filings has almost doubled in the last two quarters, says Jeff Becker, managing director and co-head of the software banking group at JMP Securities. A perception that the IPO window is opening has also caused venture investors to be more aggressive of late in pursuing offerings for portfolio companies.

“In our sector, no deals have been put off because of credit conditions,” Becker says. Since software is an industry that does not take on much debt, he says, “it’s almost a safe haven or countercyclical play to anything credit-related.”

Withdrawals have also been infrequent in the tech sector, although other areas haven’t fared as well. Last week, Golub Capital Partners, which provides debt and equity financing for mid-sized companies, withdrew its planned $150 million IPO.

In life sciences, ZARS Pharma, a venture-backed developer of topically applied drugs, withdrew its planned $75 million IPO earlier this month, citing “market conditions.” Indeed, investors have been less receptive overall to biotech and pharmaceutical companies. Earlier this month, MAP Pharmaceuticals, a venture-backed developer of respiratory therapies, slashed its offering price to $12, from an anticipated $14 to $16 before shares began trading. The stock fared better in the aftermarket, rising to about $16.

As for companies that do make it to market, the registration process is taking longer than it used to, says Becker. Sarbanes-Oxley regulation and a lengthier wait for securities officials to complete reviews means that a typical IPO will take four months from registration to market debut. In the past, three months was common, he says.

Accounting for the wait from registration to market debut, Becker predicts IPO volume will hit peak momentum for the quarter between late October and the Thanksgiving holiday, with another surge likely in December.

While biotech companies are encountering difficulties pricing offerings in their anticipated range, the few technology deals that are making it out are receiving a warm reception on Wall Street.

Case in point last week was Compellent Technologies (NYSE CML), an Eden Prairie, Minn.-based provider of network-storage computers for schools and government agencies. Its stock rose 79% on its first day of trading last week. The company raised $81 million, selling 6 million shares at $13.50 apiece, which topped the $10 to $12 a share the company projected.

The company raised about $53 million from investors, including El Dorado Ventures and Crescendo Ventures, with each holding a 21% stake prior to the offering. Other venture backers include Cargill Ventures (11%), Centennial Ventures (10%), Affinity Ventures (7%) and Nomura International (6%).

The Compellent offering followed a $107 million IPO the week before by Constant Contact, a venture-backed provider of Web-based marketing software. Its shares soared 73% in first-day trading, with the stock holding gains in aftermarket trading. The Waltham, Mass.-based company raised about $38 million in funding from Greylock Partners, Hudson Venture Partners, Longworth Venture Partners, Morgan Stanley Venture Partners and others.