Venture-Backed IPO Market Comes Back to Life

by: Renaissance Capital IPO Research

A total of thirteen companies went public in the past month, five of which made their debuts last week, making it the second busiest IPO week of the year. Coupled with the fact that eight companies submitted initial filings with the SEC and three announced terms during this same week, the IPO market is well on its way to witnessing a level of activity that has not been seen in nearly two years. Looking ahead, there are already six companies scheduled to price in December, a number that we expect to increase after the holiday weekend as companies rush to complete deals before the IPO market officially closes up for the year.

Signs pointing to a more robust IPO market are especially piquing the interest of the venture capital community. Year-to-date, there have been nine VC-backed IPOs (17% total), compared with the seven that took place during 2008 (23% total). These nine deals raised approximately $1.2 billion in proceeds, double the amount raised in 2008. The upward trend is expected to continue with IPOs in the pipeline including an increasing number of venture-backed tech companies that hope to mimic the recent successful debuts Fortinet (NASDAQ:FTNT) and A123 Systems (AONE).

New venture-backed entrants into the IPO pipeline include mobile TV chip designer Telegent Systems (TLG), broadband access equipment vendor Calix Networks (NYSE:CALX) and online pay-for-performance marketing firm QuinStreet (NASDAQ:QNST). Even biotechs are entering the fray, with recent IPO filings from Ironwood Pharmaceuticals (NASDAQ:IRWD), Trius Therapeutics (TSRX) and Alimera Sciences (NASDAQ:ALIM). Of the 21 new IPO filings over the last month, 11 (more than 50%) have come from companies with venture funding. In aggregate, these new venture-backed IPO filings plan to raise over $1.4 billion with individual deal sizes range from $55 million to $250 million.

Most recent venture-backed IPOs have performed well

Network security specialist Fortinet (FTNT), which debuted last Wednesday, experienced a first day return of 33%, ranking fifth on our list of highest first day "pops" year-to-date in the US. Four of the top ten deals on this list are venture-backed. Fortinet's backers are Redpoint Ventures and Meritech Capital. Other venture-backed companies that have been well received by investors this year include online restaurant reservation company OpenTable (NASDAQ:OPEN), which rose 59.5% when it debuted on May 20, battery systems provider A123 Systems (AONE), which rose 50.3% on Sept. 23, and remote connectivity software provider LogMeIn (NASDAQ:LOGM), which rose 25.1% on June 30. Notably, most of the venture-backed IPOs so far this year have held up in the aftermarket, leading to a number of successful follow-on offerings and providing further liquidity to venture investors.

In addition to OpenTable and LogMeIn, enterprise software vendor SolarWinds (NYSE:SWI) priced an all-insider secondary offering in mid November, while on-demand clinical trials management software provider Medidata (NASDAQ:MDSO) recently filed for a follow-on offering (also 100% insider).

Offerings like these have caught the attention of venture capital investors, who have been struggling to monetize their portfolios ever since the market meltdown brought overall IPO activity to a standstill in 2008. However, with the broader markets rallying strongly off their lows, valuation multiples rebounding to healthier levels, and most importantly, IPO investors warming up to attractive growth stories, the environment for venture-backed IPOs is set to pick up over the next several months, particular from more mature venture-backed companies with proven revenue models and sound levels of profitability.