Going Public

Current Conditions Are Favorable for Tech IPOs

Castile Ventures' Carl Stjernfeldt

Atlas Venture’s Ahmet Ozalp

That’s quite a change from a few years ago, when communications IPOs lagged other industries and investors kept their distance. But these days, the number of solid, cash-flow-positive companies is growing. Many are those that made it through telecom’s nuclear winter and have emerged the stronger for it. That means now’s as good a time as any for qualified, willing businesses to take the public plunge. They stand to make millions, as do the private equity investors who have stuck with them.

“The IPO window is open, but open selectively,” says Ahmet Ozalp, partner at investment firm Atlas Venture, and a speaker at the xchange Capital 2.0 event. “Investors and bankers are looking for companies with good growth potential, and there are not that many out there.”

Wall Street is indeed hungry for more venture-backed companies to go public, confirms the Association for Corporate Growth (ACG). Daniel Varroney, ACG’s president and CEO, says private equity is contributing substantially to economic expansion in the United States; investors want to maintain the momentum. “The big question right now is, ‘Will legislation or tighter debt markets end this extraordinary boom?’” he says.

Uncertainty about the debt market does worry investors, and it’s an important point to consider when deciding whether to go public or even when signing a merger agreement. The debt markets loan money to fund IPOs and M&A, making them a crucial link between the two exit strategies. Debt has remained freely available and inexpensive over the past two years. But 68 percent of M&A pros surveyed by ACG and Thomson Financial in June said the debt market will worsen within a year.

Much of the fear stems from the volatile sub-prime mortgage market. As long as the problems stay confined within sub-prime, the telecom industry should feel no ill effects, says Carl Stjernfeldt, a partner at Castile Ventures. However, if sub-prime mortgage tanks, every other industry will go down with it.

There also is the chance interest rates will rise, making debt harder to secure.

“The prelude to a meltdown would be defaults rising,” adds Matt Niehaus, a partner at Battery Ventures and another Capital 2.0 speaker. “We haven’t seen the defaults, but some buyout deals are struggling to get done.”

At present, though, Wall Street is looking favorably on telecom/tech IPOs. Investors are most excited about contentdelivery companies such as Limelight Networks. CLECs and MVNOs do hold some appeal, in spite of some industry baggage there, but people largely are betting on Telecom 3.0, which has to do with content-delivery over quad-play networks, says Rod Randall, senior managing director of Vesbridge Partners LLC. He also will speak at Capital 2.0.

Niehaus agrees.

“Will there be more Limelights?” he asks. “Gosh, I hope so because if not we’ll still have a crappy Internet video experience.”

The takeaway is that Wall Street has become very picky about its investments. Not every company can expect a receptive welcome, especially if it doesn’t offer a different product or service or business model to those of its competitors. Service providers, more than other companies, have to create mind share with brand and product, investors say. And investors want to pump money into profitable companies that have been around for a while — not ones that are 18 or 24 months old. So even though the telecom industry can’t control what other sectors do, if it plays by Wall Street’s new rules, it could find itself on investors’ good side, at least for a while.

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