Insights and Opinions

 

Tuesday, August 17, 2010

By the Numbers: The Returns from Southern California IT IPO's 1995-2009 (Part 3)

from Jon Funk





In prior columns in this space, we analyzed the outcomes of southern California IT IPO's from 1995-1998 and 1999-2000, using 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 third and final in the series, and looks at the same category of IPO's for the period 2001 forward to the present. You can see all previous columns on outcomes of southern California IT startups here.

Previously, we reviewed the performance of southern California technology IPO's from 1995 through the end of 2000. A total of 52 companies, or an average of about 9 per year, were able to complete public offerings and provide an eventual exit vehicle for pre-IPO shareholders.

At the end of 2000, the "bubble" period of late 1998 to mid-2000 was officially over. There were no IPO's in our category at all in 2001 and 2002 as the public markets languished in the doldrums following the declines of the previous year.

In 2003, financial markets and investor interest had recovered sufficiently to permit a select few companies to sell stock publicly. From 2003 until the crash of the financial markets in late 2007, 15 companies, an average of 3 per year, went public. Markets displayed a healthy rationality, pricing these IPO's at an average of $366 million. By the time liquidity was available, and using our proxy value, these 15 had risen an average of 19% to an average potential exit value of $438 million.

Notable names from an exit value perspective included Cogent (proxy exit value of $2.2 billion), DivX ($567 million), IPayment Technologies ($521 million), JAMDAT ($517 million), and Provide Commerce ($405 million).

Cogent was by far the most highly-valued IPO in the period, and yet received no outside equity capital, based on a review of the company's S-1 from 2004. Cogent was founded in 1990 and went public in September 2004 with an initial valuation of $1.4 billion, which had risen 59% to approximately $2.2 billion within 12 months using our proxy value. As of the filing of the S-1, nearly all of the shares were held by the founder.

After the meltdown in the markets beginning in the fall of 2007, the IPO window slammed shut. However, it's encouraging to note that beginning early in 2010 four companies have successfully completed IPO's, signaling perhaps a return to a more receptive environment, as well as an implicit acknowledgement that, while the public markets fluctuate, good companies are forming and flourishing.

Beginning in March 2010, MaxLinear (value at close of first day of trading $585 million), ReachLocal ($416 million in May), RealD ($939 million in July) and Green Dot ($1.5 billion in July) all came to market. Notable venture capital backers of these companies include Mission Ventures, the Tech Coast Angels, Sequoia Capital, VantagePoint and Shamrock Capital.

Presuming major shareholders in each company are subject to a six-month "lockup", the opportunity to liquidate holdings won't be available until later this year and into 2011. As the 12-month mark passes for each, we will calculate our proxy estimate of potential exit value for these shareholders.

As a further encouraging sign, three additional companies (GameFly, NewEgg and Demand Media) have filed S-1's recently, although the timing and value of these offerings is yet to be determined.

Jon Funk has been directing Series A investments in emerging information technology companies in Southern California for over 25 years. He is a founder of OceanRoad Partners and 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 VeeBeam Communications and ClariPhy Communications. All opinions, views, overstatements, understatements, misstatements and other inaccuracies, perceived or otherwise, are the author's alone.


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