VC-Backed IPOs Jump in Q3

Normally, the number of venture-backed IPOs jumping almost 100% from one quarter to the next would be a cause for celebration. Champagne would flow and venture capitalists would dab the tears of joy from their eyes with their blue shirt sleeves.

But despite a rise in third quarter IPOs, the VC-backed IPO market is still a shadow of its 2004 self as venture investors are finding that the M&A market provides more consistent exits.

A total of 18 VC-backed companies launched IPOs in the third quarter for about $1.3 billion, according to preliminary numbers from Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association (NVCA) That is a significant jump from the second quarter, when only 10 VC-backed companies began trading on public markets in offerings worth about $714 million. In comparison, in the third quarter of 2004, 24 venture-backed companies held IPOs for more than $3.2 billion.

In 2004, 93 VC-backed companies held IPOs for more than $11 billion. There is little hope of reaching that level this year. The next three months of the year would have to see 55 venture-backed IPOs to catch up to last year’s IPO numbers.

“You’re going from very, very poor to very poor,” says Mark Heesen president of the NVCA. “This isn’t a time for excessive jubilation. It is good to see the up-tick but that’s what it is, just an up-tick.”

Heesen points out that the M&A market saw healthy activity in the third quarter with about 74 venture-backed companies getting acquired, based on preliminary data.

“There continues to be a sense within the venture market that if you can get your company acquired in an efficient manner and at a good price, then that’s a good way to go as opposed to an IPO,” he says.

Still, it was Baidu, China’s version of Google, that was the quarter’s most celebrated IPO. Baidu, a Beijing-based Web search provider, launched an IPO in August and saw its stock rise from $27 a share to $123 a share on its first day of trading. Draper Fisher Jurvetson’s Asian affiliate ePlanet Ventures owns a 28% stake in the company, which is worth about $1 billion depending on market fluctuations. Other backers of Baidu include Bridger Management, China Equity, China Value and Venture TDF, Google, Integrity Partners and Peninsula Capital.

Besides Baidu, a diverse field of companies held IPOs in the third quarter. For example, among the 18 newly public companies are pharmaceutical companies such as Avalon Pharmaceuticals, Coley Pharmaceutical Group and Sunesis Pharmaceuticals as well as such technology companies Advanced Analogic Technologies and Hittite Microwave Corp.

John Fitzgibbon, an analyst with IPO reporting firm IPO Desktop, has a positive outlook for the IPO market. He credits the quarterly increase with an increase in IPO traffic overall.

“IPOs have been picking up since the Nasdaq hit its low at the end of April,” Fitzgibbon says.

He says that it’s still a bull market for IPOs, despite a host of adverse economic events – Interest rate changes, oil up to $70 a barrel, natural disasters and exploding debt.

“These are not exactly the groundwork for a bull market,” he says. “People have had every reason in the world to bail out of the market and they haven’t.”

Fitzgibbon says that he expects to see a continual increase in the flow of IPO traffic in the forth quarter.