Insights and Opinions

 

Monday, June 14, 2010

By the Numbers: The Returns from Southern California IT IPO's 1995-2009 (Part 2)

from Jon Funk





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 or since.

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 years

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.


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