Like Fine Wine, No IPO Before Its Time

The drop in market volume this year clearly indicates investors have bolted for the hills, as “hot” investment opportunities run out of steam quicker than the reality television craze.

Indeed, this year has seen a dramatic surge in the average number of days it has taken for a venture-backed company to exit through an IPO. According to Venture Economics, in 1999 a company took an average of 140 days to go from its first round of financing to its initial public offering. Yet, two years later, that average has skyrocketed to 487 days, a jump of 247%.

Historically, the median age to an IPO from a company?s founding is seven to eight years, said Jay Ritter, professor of finance at the University of Florida. The two data points can be intermingled, given that the vast majority of VC funding over the last two years occurred shortly after a company?s inception.

Having tracked data on the IPO market for the last 21 years, Ritter believes the last two years were a fluke and are unlikely to be considered benchmarks for the initial public offering market, aside from the enormous coffers of cash that were raised.

“What we saw were lots of Internet companies, and their burn rate was incredibly high,” said Ritter. “This combination largely accounts for why it was so short a time from financing to an IPO.”

Yet the numbers paint a larger picture than mere greed, he said. “The 1999 to early 2001 was unusual in terms of one industry dominating things. Very few IPOs outside of these sectors saw these sky high valuations.”

Given the bottlenecked IPO market this year, the data certainly didn?t surprise anyone. Yet with the break-neck speed of funding and public offerings during the IPO “boom years,” is today?s longer path to an exit strategy potentially toxic for the VC community in the long run?

Numbers Can Be Misleading

In spite of the spring downturn, last year?s market still saw 174 VC-backed IPOs. According to Ritter, venture-backed IPOs accounted for 59% of the total offerings from 1999 and 2000. From 1997 to 1998, it was 29%. Up through mid-August 2001, there have been just 28, according to Venture Economics. Is this evidence of darker days to come?

Not everyone thinks so. Such numbers, contends business and finance attorney Ken Koch, do not paint an accurate picture of this year?s market.

“Those statistics don?t reflect other vehicles being used. Although 1999 and 2000 were aberrations, the 2001 figures understate the level of market activity,” he said.

Koch, a New York-based partner of attorney firm Mintz Levin Cohn Ferris Glovsky and Popeo, pointed to a rise in activity in public shells, or reverse mergers, that he?s seen this year. (Shelling is a method for a private company to go public by acquiring majority ownership in publicly listed company that has no assets or liabilities).

“I?m not saying it?s easy by any extent. There?s no question that it?s much tougher to get VC financing,” said Koch. “But there has been a rise in these previously shunned vehicles.” And when all is said and done, such exit strategies into the public market only serve to tally up favorably in the long run.

How Long Is Long Enough?

Peet?s Coffee and Tea (NNM:PEET), the first IPO of 2001, had a gestation period of five years before going public. “In 1996 we were a strong Bay Area player with a vibrant mail order business, but we were not in grocery stores, in offices, where we wanted to be,” said CEO Chris Mottern. “Building the brand became the central focus. There are not many shots to take in the public market, and if you look at dotcoms, you?ll see that it?s true. That?s why it?s worth waiting.”

While Mottern admitted “a variety of people” pressured the company to go public sooner, he said, particularly during the IPO craze, the wait paid off. Underwritten by WR Hambrecht & Co., Peet?s stock was offered at $8. At press time, the Emeryville, Calif.-based company was trading at $8.50, one of just 31 IPOs this year to trade above its offering price. Unlike most CEOs of newly traded public companies, Mottern is able to say he?s “pleased being in a public market.”

The Wright Place

“We?ve had some frustrating times in 1999 and 2000, when the model was not in our favor. You saw successive rounds at very high valuations,” said Jim Neary, a partner at Warburg Pincus LLC. “Going to different VCs, the expectation to see a payoff in a short time period, none of that was justified. Now it?s come back around to our model.”

In the embattled 2001 IPO market, Warburg Pincus stands out as a survivor, being one of two private equity venture firms that can log more than one public offering this year. Robertson Stephens was the other, with investments under the former BancBoston Robertson Stephens name.

In March, Warburg saw a $100 million offering from its energy-related Encore Acquisition Co. (NYSE:EAC), which priced at $14; the stock closed at $14.79 at press time. And last month, its Wright Medical Group (NNM:WMGI), a maker of orthopedic devices, priced at $12.50 in a $93 million offering and closed at $15.70 last Thursday.

As venture capitalists, investors, and I-bankers alike assess the market going forward, they remain hopeful. “The infrastructure has been built for the next generation of Internet products,” Koch said. “It?s similar to what it was in the 1980?s? lots of biotechnology companies failed but amazing things have come out of it.”

Contact Colleen O?Connor:Colleen O?