The Summer of (IPO) Love

    By Michael V. Copeland

    Will 2009 go down as the year the tech IPO returned?

    If you have been an investor in technology IPOs in recent months you’ve done well.

    Starting in April, and really gathering momentum this summer, there has been a slew of tech companies that leapt through the public market window including Changyou (CYOU), Rosetta Stone (RST), OpenTable (OPEN), and most recently Emdeon (EM).

    According to IPO research firm Renaissance Capital, the average overall return from the 10 tech IPOs since April has been 30% (with the biggest return, 138%, coming from online gaming company Changyou.com). Of the 21 companies that have gone public since the beginning of 2009, 10 have been tech companies.

    Which means what, exactly? That as long as the market doesn’t melt down completely, more tech companies will go public, of course. And if you thought there was momentum this summer, just wait for October and November, a time of year when historically private companies have clamored to make their public debuts.

    Right now in Silicon Valley, investment bankers are busy making the rounds of promising portfolio companies trying to convince them of the wisdom of an IPO. There is always the question of what kind of company can – or should – go public. During the last wave of tech IPOs, after the dotcom bust, the rule of thumb was that firms with $100 million in revenue and profitability were IPO candidates.

    Investment bankers on the prowl in Silicon Valley

    Now, according to one prominent venture capitalist who asked to remain anonymous, investment bankers are telling him, “If a company can show revenue of $15 million per quarter, a good business model – and if not profitability, a path to profits – they can deliver an oversubscribed offering.” (One wonders wonder whether these simply are investment bankers who have had nothing to do for the last 12 months, trying to make their bonus figures.)

    Venture capitalists have not had much to be happy about, either. It wasn’t just IPOs, but acquisitions that came to a screeching halt during the recession. Both of these groups desperately want the IPO window to stay open, and so far it is.

    So are these 10 tech IPOs the start of a new wave of exits for venture capitalists, a strategy that doesn’trely on Google (GOOG), Cisco (CSCO) or Microsoft (MSFT) buying the companies they've financed in hopes of hefty returns? It sure could be.

    Mutual funds like growth, too

    Clearly, there is an appetite in the public markets for growth. And even in the teeth of this recession, technology companies are showing signs of expansion (the other sector that's growing is energy). With hedge funds licking their wounds, analysts say, other kinds of institutional investors, including more sober-minded mutual fund managers, are emerging as the group most interested in IPO shares of tech companies. They want to show growth too, and tech IPOs at least at the moment, are giving it to them.

    What is different from when Google went public is that these are not billion dollar IPOs for the most part, but companies that will garner market caps of several hundred million dollars. For that reason it’s also a different set of bankers taking these companies public.

    In Google’s day it was bulge-bracket investment banks – Morgan Stanley (MS), CSFB (CS), Goldman (GS), Lehman Bros or no one. The economics of the banks (characterized as going "down-market" to even do $500 million IPOs) required bigger deals. Today’s deals, with their much more modest size, are better tailored for the boutique banks – Thomas Weisel Partners, Jeffries, JMP Securities, Piper Jaffray, and the like. These are the banks pounding the streets in Silicon Valley the hardest.

    Could it all end badly? Of course, and usually it does when the rush toward IPOs at some point sends half-baked companies into the public markets and they tank. But between now and then we are likely to see a group of very high quality tech companies look to go public – think Greenplum, LinkedIn, Pacific Biosciences and Zynga among many others.

    For those investors with the stomach, it might not get much better.