Tech IPOs get warm reception in Q1

Two venture-backed companies—Aruba Networks and SenoRX—launched IPOs last week, capping an active first quarter for public market exits by tech startups.

Overall, 15 VC-backed companies priced on U.S. exchanges during the first three months of the year for a cumulative take of $1.96 billion. In comparison, 20 offerings raised $1.63 billion during the preceding quarter, and 10 IPOs raised $541 million in the first quarter of 2006.

Wireless networking equipment maker Aruba (Nasdaq: ARUN), which saw its share rise 29% last Tuesday in first-day trading generated a market capitalization of $1.1 billion. Sunnyvale, Calif.-based Aruba has not yet reported a profit.

But its aftermarket performance has VCs taking notice. Kodiak Venture Partners, for one, is eagerly watching the IPO market. General Partner Chip Meakem says that Kodiak has two semiconductor companies, two software companies and one services company in its portfolio that are in IPO discussions with investment bankers. The bankers are telling Kodiak that the companies don’t necessarily have to be profitable to make it out, as was the case with Aruba.

“They are getting out successfully based on a promise of a high growth rate and a large open market in front of them,” Meakem says.

While Aruba has not yet posted a profit, investors were drawn to the company’s impressive revenue growth rate, says Scott Sweet, managing partner of IPO Boutique. “Obviously investors take notice of profits, but they also see that Aruba is clearly spending copious amounts toward R&D, and with sales increasing well over 100% a year, they’re accepting that,” Sweet said.

Aruba’s largest venture shareholder, Matrix Partners, held a stake worth $210 million, based on a $14 a share close last Thursday. Other venture firms with sizeable stakes included Sequoia Capital ($192 million), Trinity Ventures ( $143 million) and WK Technology ($71 million). VCs invested about $86 million in Aruba since 2002.

Similarly, investors also profited from the market debut last week of SenoRX (Nasdaq: SENO), an Aliso Viejo, Calif.-based developer of biopsy devices for early detection of breast cancer. The company priced 5.5 million shares at $8 each, below its proposed offering range. As of the first day close, MPM Capital was the company’s largest venture shareholder with a stake valued at $17.6 million. Domain Associates holds a stake worth $11 million and Mayfield Fund holds shares valued at $7.2 million. SenoRx raised $55 million from venture investors since 1998.

SenoRx’s mediocre performance is typical of health technology offerings recently, says Sweet, noting that it’s now commonplace for companies in the sector to slash their share price range or offering size prior to going public.

While investors demand for biotech offerings has been lackluster lately, technology IPOs have been gaining momentum. Offerings in recent weeks by tech companies such as BigBand Networks, Clearwire, SourceFire and Glu Mobile stand to produce generous returns for venture backers, provided share prices hold up long enough for VCs to sell their stakes. Investors are also exhibiting renewed enthusiasm for growth stories, purchasing shares of companies such as Aruba that are not profitable but are rapidly ramping up sales.

Next quarter, the tech IPO trend is certain to continue, says Sweet, with a full pipeline of offerings in registration from venture-backed companies. Investors attention, however, may be less focused on tech over the next few months, he says, as market watchers focus on the most anticipated offering of the next quarter: the $4 billion IPO of private equity fund The Blackstone Group.