At computer-backup company Carbonite, president Keith Cooper has been watching the progress of smaller companies that went public this year, such as Internet marketer ReachLocal’s $54 million debut in May and software firm Convio’s $46 million offering in April. He says managers at his fast-growing Boston software-as-a-service company are encouraged enough by the numbers to begin a nine-month process to take Carbonite public.
Cooper understands that conditions aren’t exactly ideal. ReachLocal and Convio’s IPOs raised less than had been hoped, and in recent weeks, the market has zigzagged up and down like a rickety roller coaster. As of mid-June, 2010’s IPOs were barely up in value — just 0.9 percent on average — from their IPO price.
But compared with late 2008 and early 2009, when there were no IPOs at all, today’s IPO market is a big improvement. A total of 63 companies have gone public in the first six months of this year, compared with 59 in all of 2009, according to IPO research firm Renaissance Capital. The number of IPOs under $100 million in value — the size common for small business offerings — grew this year too, from 18 in all of 2009 to 23 in 2010 to date.
Cooper says the encouraging signs in the IPO market helped persuade him to move forward with plans for an IPO for 4-year-old Carbonite, which has 200 employees and has raised $75 million in venture capital.
“Whether the timing is right, we’ll determine in nine to 12 months,” Cooper says. “But we are preparing. We have a leadership position in our space and see going public as an opportunity to expand and maybe do acquisitions.”
The awakening IPO market isn’t just good news for IPO-ready businesses such as Carbonite. It’s also good news for small businesses seeking venture capital. IPOs provide an opportunity for investors to cash out, take some profit on their original investment in a company, and invest those profits in other businesses. After an IPO, investors and owners can’t sell their shares during the lockup period (usually 180 days), but after that, they typically begin gradually selling some of their holdings to generate cash.
“A healthy IPO market for small-cap, high-growth companies is a crucial aspect of the whole entrepreneurial process,” says Chip Hazard, general partner at VC firm Flybridge Capital. “It helps create the returns for VCs so that they can invest in other companies. It helps provide liquidity and growth capital.”
What types of companies are launching successful IPOs today? First off, small businesses in industries historically popular with investors, such as technology. Historically, one-third of all IPOs have been tech companies, a number that’s true in today’s market as well, says Ben Howe, chief executive officer at investment bank America’s Growth Capital. Other popular sectors include financial services and health care.
One interesting trend in the 2010 IPO market: There’s a welcome mat out for companies that aren’t yet profitable. In 2009, 21 percent of IPO companies were unprofitable, and in 2010 that’s grown to 36 percent, reports Renaissance Capital principal Kathleen Smith. It’s not exactly a return to the market of the late nineties, when 75 percent of IPO companies were unprofitable, but there’s more opportunity now than there was last year for companies still seeing red ink.
One example of an unprofitable company trying an IPO now is car-sharing service Zipcar, which filed for a $75 million IPO in early June. The 10-year-old company maintains car fleets in more than a dozen cities and has spent heavily on acquisitions and expansion in an effort to dominate its niche.
As in past IPO markets, unprofitable companies “need to be growing very quickly,” says Hazard, “be a clear leader in their respective market, and have a story about their clear path to profitability that’s credible and well understood by potential investors.”
The forecast for the rest of 2010, says Howe, is for a growing number of small-company IPOs, based on several factors:
- A busy pipeline of smaller IPOs: Howe says the average annual revenue of companies that have gone public so far this year is $205 million, but the average for companies that have filed and are still waiting to go public is under $100 million.
- VCs looking for an exit: Because the IPO market was at a standstill for much of last year, there’s a backlog of companies whose investors are at the point of wanting to realize their profits and move on, says Howe. So there’s pressure at many companies to try an IPO soon.
- Hungry underwriters: Hazard notes the investment banks that back company IPOs need to do deals to make a profit. After such a slow IPO market last year, bankers are actively looking for companies to take public.
- Marquee names waiting in the wings: Big-name IPOs of buzzworthy companies could help the IPO market revive further and open the door for more small companies to try the public markets. Hazard says three possible big-ticket IPOs in the near term are social media sites LinkedIn and Facebook, as well as online-game creator Zynga of FarmVille fame.
Business reporter Carol Tice contributes to several national and regional business publications.