In the Insights
and Opinion section on April 5, we profiled the outcomes of southern
California IT IPO's from 1995-1998, and described a simple arithmetic
proxy to approximate the eventual potential return to pre-IPO shareholders,
including venture capital firms. This Insights and Opinions
column is the second in the series and looks at the same category of
IPO's for the period 1999-2000.
It is a decade in the
past, but those who were in technology in 1999 and 2000 remember it
as a unique period, almost surreal in its intensity and scope. The pre-crash
period lasting until March of 2000 was characterized by the avid pursuit
of any stock related to information technology, completely detached
from fundamental value metrics, especially any company with the phrase
"dot com" related to its business. It saw public market values
for Cisco and Microsoft exceed $500 billion, values never seen before
After peaking in March
of 2000, the bubble "burst", as the NASDAQ dropped 9% in one
day. The index continued to fall, losing 50% of its value by the end
of 2000, effectively slamming the door on IPO's for the next several
Today, in spite of
having grown substantially since, Cisco and Microsoft are worth one-third
and half of their highs in that period, respectively. (By comparison,
today the company with highest US market capitalization is Exxon Mobil,
at $291 billion.)
The public market frenzy
translated into a surge in IT IPO's starting in late 1998 (see our previous column), growing into a pace of one
every three weeks in 1999 and into 2000.
There were 25 reported
IPO's for the period, with 23 of them occurring before March 2000. Summing
the values of the IPO's at the end the first day of trading, the group
totaled a market capitalization of nearly $32 billion, or an astounding
average of $1.3 billion each. Famous names from the period by that metric
were eToys ($7.8 billion), MP3.com ($4.2 billion), NetZero ($3 billion)
and Accelerated Networks ($2.4 billion).
These values would
drop substantially as the markets collapsed in the spring and summer
of 2000. As a group, the 25 IPO's had lost 38% of their value (using
our proxy value) by the time large pre-IPO shareholders could expect
liquidity 6-12 months after the offering .
Several offerings bucked
the tide and provided gains in the aftermarket, including Stamps.com
(up 171% to $3.8 billion), Homestore.com (up 146% to $1.3 billion),
Goto.com (now known as Overture Services), up 137% to $2.3 billion,
and Digital Insight (up 140% to $1.1 billion).
But the vast majority
ran into the downturn in values. Separating out the four names already
mentioned, the other 21 IPO's lost an average of 60% of their value
over the next 6-12 months. eToys fell 64% to $2.8 billion, MP3.com 72%
to $1.2 billion, NetZero 65% to $965 million and Accelerated Networks
96% to $84 million.
It's worth noting that,
with the exception of Accelerated Networks, those investors who liquidated
their holdings in the proxy period still were able to sell at high values
in historical terms.
In summary, the period
permitted great wealth creation, but ultimately included the beginning
of the return to a more rational period. In our next column we will
review IPO's completed during the period 2001-2009.
Jon Funk has been directing Series A investments in emerging information technology companies in Southern California for over 25 years. He has been a Managing Director with Allegis Capital since its founding in 1996. Jon's Allegis Capital investments include Sandpiper Networks, Rent.com and Shopzilla. He currently on the Boards of Staccato Communications and ClariPhy Communications. Jon wishes to thank Beth Fairchok for her diligent and accurate research supporting the data and calculations used in the article. All opinions, overstatements, understatements, misstatements and inaccuracies are the author's alone.