Why Is the Tech IPO Pipeline So Dry?

0307-0931The S&P 500 is up 50 percent from its March lows, a rebound that has helped to thaw the IPO market from the deep freeze it entered last fall. Twenty-one companies have gone public on U.S. markets so far this year, 10 of them technology firms. And according to Renaissance Capital, those 10 tech IPOs are up an average of 30 percent from their offering prices.

So the tech IPO market is back, right? Judging from the tone of investors and bankers, you might think so. As Michael Copeland of Fortune noted this week:

Now, according to one prominent venture capitalist who asked to remain anonymous, investment bankers are telling him, “If a company can show revenue of $15 million per quarter, a good business model – and if not profitability, a path to profits – they can deliver an oversubscribed offering.”

There’s just one problem. While Wall Street is ready to throw a big IPO party for startups, few have indicated they plan to show up. The period between September and November is often a heady one for IPOs. But companies typically file their prospectuses three to six months ahead of their planned debut and at this point, few have done so — especially in the tech sector.

So far this year, according to Renaissance, 37 companies have filed for IPOs, down 73 percent from the same period last year. Meanwhile, 38 companies have withdrawn their planned offerings. What’s more, among the tech companies that have gone public, the amounts raised are smaller than last year: $200 million on average, compared $650 million in 2008.

Tech companies are especially quiet. The list of firms that have filed for IPOs since June is dominated by financial and consumer companies –- only four on that list are in tech, including Fortinet, a maker of network security software, and genealogical site Ancestry.com. Conspicuously absent from the list is a marquee name like Facebook, which is adamant that it won’t file for an IPO until next year at the earliest .

While it’s encouraging that the stock market’s rally this summer hasn’t ignited a speculative rush among IPO candidates, you have to wonder why things are so quiet. Technology startups are usually a big part of the IPO pipeline. Despite the long drought in venture-backed stock offerings, the need for capital and the hunger among VCs for exit strategies, there is little pent-up demand for listings.

So why the reluctance? Apparently a belief that things are not looking up from here. Commentators who called the March bottom are now sayingthe rally is over. TrimTabs Investment Research, which tracks market liquidity, says corporate insiders sold $6 billion worth of shares in August. Insider selling is often a sign that companies see a market top, and this month insiders sold a record 30 times as much as they bought.

Like any corner of the financial markets, IPOs can be ruled by greed or fear. IPO activity has been distorted by greed many times in the past, but for now, fear seems to be the predominant feeling.

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