Silicon Valley Is Gearing Up for an IPO Comeback

The initial public offering market is serious business in Silicon Valley. Many venture capitalists won't fund start-ups that they can't take public for a rich profit or sell to Google (GOOG) for an obscene price. The upshot for tech entrepreneurs is that if their company isn't obvious IPO material or doesn't have an clear exit strategy for investors, they may not be able to secure funding. And if they can't secure funding, their companies might cease to exist.

Small wonder then that the IPO drought has been devastating to the Silicon Valley ecosystem. The halt in public offerings -- the likes of which hasn't been seen in decades -- meant venture capitalists were extremely cautious about where they parked their money.

"Basically we had a six-month shutdown," says Kathleen Shelton Smith, principal at Greenwich, Conn.-based IPO research firm Renaissance Capital, referring to the period between September 2008 and March 2009. "It was the longest time this market has been shut down since, well, you have to go back to the '70s."

Back From the Dead

The current IPO market is finally showing signs of life, though it's still nowhere near 2007 or 1999 levels in terms of volume or deal size. So far in the first quarter of 2010 alone, four California companies completed IPOs, compared with only six for all of 2009.

Not surprisingly, the tech industry has benefited most from the revived market. Of the 44 companies that have completed IPOs in 2010, 19 were tech companies. The average first-day return for tech IPOs was 12.2%, which was higher than any other industry, according to Renaissance Capital.

Case in point: FinancialEngines.com (FNGN), a Palo Alto, Calif.-based provider of tech-driven portfolio management services and investment advice, was expected to sell 10.6 million shares at $9 to $11 per share. Instead, shares priced at $12, and the stock closed at $17.25 on its first day of trading last week. (It was the first time since November 2009 that an IPO priced above the projected range.)

Still, longtime venture capitalist Stewart Alsop of Alsop Louie Partners says the IPO market shouldn't affect VCs' investment decisions, given that it takes anywhere from three to seven years to fully develop a company, in which case, any investor who is looking for a short-term gain could be gravely disappointed.

"Now that the economy feels like it's getting better, I think there are going to be a fair number of companies going public," says Alsop. "That's great from a VC's point of view because it means you can get higher returns. But it's not a factor at the point of investment. At the time you invest, you have to really believe in the future of the company."

In the case of FinancialEngines, as Alsop points out, the IPO was more than a decade in the making: VC firm New Enterprise Associates first invested in the company in 1997.

Smaller Deals Suggest a Healthier Market

Judging by the number of Silicon Valley/tech businesses that have registered for a public offerings over the last couple of months, though, there's a sense that the IPO is back, even if it may not lead to fabulous riches like it did in the go-go 1990s.

In the last two weeks alone, Pleasanton, Calif.-based IronPlanet, which operates an online marketplace for used construction equipment, registered for a public offering, through which it expects to raise $92 million. (The company was funded by Kleiner Perkins and Accel.) MagnaChip Semiconductor, a Korean company with operations in Cupertino, Calif., registered to raise $250 million in an IPO. Calix Networks, a Northern California-based provider of broadband access systems, registered to raise $42.5 million to $53.1 million in an IPO. One key difference between the deals getting done today and those done in 2007 is their size.

"On average, we're seeing smaller IPOs in 2010," says Shelton Smith. Still, smaller deals may be an indication of a healthier market. "In nervous periods, IPOs are bigger. Only the big [offerings] get done because nobody wants to touch the smaller ones. Nobody wants to get involved in an IPO that can't deliver a return."