VC Market Sets Stage for IPOs

Showing continued faith in investor appetite for venture-backed initial public offerings, three private firms recently completed sizable late-stage venture deals intended to set the stage for initial public offerings later this year. The companies came from a mix of industries, including telecom and business-to-business, two of the hottest sectors in the current market.

BigStep Takes IPO Leap

Bigstep.com, which helps small businesses make a name for themselves on the Internet, has placed itself onto the radar screen of investment bankers after completing a $50 million round led by a mix of venture and strategic investors, including Compaq Computer Corp. and Office Depot Inc.

“I think that the company is probably an IPO candidate sometime this year,” said Allen Morgan, general partner of the Mayfield Fund, an early-stage backer of the company. While the company has yet to engage an investment bank, Morgan and other Bigstep.com investors believe that Wall Street is interested in tapping the lucrative SOHO (small and/or home offices) market any way it can.

Just recently, Onvia.com Inc., a Seattle-based goods and services trading hub for the SOHO market, placed an eight million share offering through Credit Suisse First Boston at $21 per share. After hitting a high of $78 per share in second-day trading, the company’s stock was seen at $31 11/16, up $1 1/4. Industry rival Digitalwork.com Inc. is in registration for a $75 million offering led by Lehman Brothers. And, by all indications, Bigstep.com may soon follow suit.

“In the previous round, we had [U.S. Venture Partners] and Mayfield,” said Andrew Beebe, chief executive at Bigstep.com. “In this round we went with some later-stage funds more familiar or more focused on the IPO market.”

Joining Compaq and Office Depot in Bigstep.com’s Series C round were PCG Ventures, Worldview Partners and Draper Richards. Beebe added that corporate partnerships could help provide additional private equity prior to a public offering given that the public market is becoming more selective when it comes to Internet deals.

Indeed, Bigstep’s investors don’t feel pressure to tap the public market just yet, although they are keenly aware of the bull-market-bred persistence practiced by most investment bankers. While they recognize that several major players – Amazon, Microsoft and Yahoo! among them – offer competitive products, they intend to make the company “market agnostic”, relying instead on bygone principles of business development.

“We are focused on building a company that could go public in any market,” said Marc Friend, general partner of USVP. “There has got to be an understanding, at least in story, about what gets you [profitable].”

Taqua Systems Emerges With $56.3M

Derived from an Inuit expression meaning “emerging with great force,” Taqua Systems intends to use the proceeds from its latest equity round to emerge from the pack of telecommunications equipment providers by capturing the under-served secondary and tertiary markets. Boosting its total funding to $83.2 million, Taqua tapped Bowman Capital to lead its latest equity financing. Additional participants included Vulcan Ventures, Soros Private Equity Partners and Charles River Ventures.

“The telephone switching market has been dominated by Lucent, Nortel and Alcatel,” said Richard Burnes, a partner at Charles River Ventures. “Their switches start at 800k and are difficult and expensive to maintain and program.”

While Burnes admits that the big switch makers may start to develop competing programs, Taqua is also a pioneer in the market for a carrier class small switch. Competitive local access carriers will be the company’s primary customers, but established telephone companies will also be targeted since they could use the company’s Class 5 switch as a replacement for outdated electronic switches. Burnes estimates Taqua will begin to generate revenue this quarter, setting up the possibility of a 2000 IPO.

“It’s important to get a good sense of revenue flows in succeeding quarters,” Burns said. “We’ve had 60 IPOs, and the ones that were successful had clear visibility of revenue for coming quarters. I would expect a [Taqua] offering by the second half of this year.”

Taqua’s Open Compact Exchange (OCX) architecture provides a laundry list of benefits to carriers seeking to crack smaller markets. The OCX is available for a fraction of the cost of its major market brethren, yet affords the same variety of services. It’s smaller, cheaper, scaleable and readily programmable, allowing its users to quickly address the needs of each “micro market” in order to gain advantage over the incumbent carrier.

Burnes is understandably bullish on his investment, which he attributes to the market’s appreciation for true technology offerings, not the pseudo-marketing plays that have steadily strutted to market from the Internet sector.

“It’s interesting to watch the return of the public market to companies with strong engineering. You see this in Sycamore Networks’ offering, and in an offering we’ve got coming up from Sonus Networks,” he said. “It’s worth pointing out and it’s healthy. You have to credit the market… they have been giving these companies very good values.”

University Access Makes Grade

The private market’s demand for a $42 million placement by University Access, a Los Angeles-based provider of distance learning services for corporations, is seen by company officials as a prelude to a possible run at the public markets later this year.

Initially capped at $25 million, University Access opened up the books to accommodate excess demand for its Series E round of equity financing.

“We were oversubscribed and happy to take the additional funding,” said Tom Geniesse, chairman and co-founder, adding that University Access is on course for an IPO later this year. “Nothing has changed, except that we are being very aggressive.”

Investor AB led the round, which included contributions from Pearson/FT Knowledge, GE Equity, Sandler Capital, Leeds Group, DHM Arcadia Partners, Quad Capital Partners and several private investors. The $42 million total includes the conversion of approximately $6 million worth of convertible notes. Credit Suisse First Boston acted as placement agent on the deal.

The Los Angeles-based e-learning company intends to unveil several products later this year, including a Corporate MBA program with the Kenan-Flagler Business School at UNC-Chapel Hill.