Skype today added excitement to what is traditionally a slow month in the investment world by filing to raise up to $100 million through an initial public offering (IPO). Last week saw Demand Media file for an IPO on Friday and NXP, a semiconductor company, actually go public on Thursday. So is the technology IPO back, or is this just another flurry of activity that will benefit a few companies before subsiding?
IPOs by the Numbers
During the first half of calendar 2010, 21 venture capital-backed U.S.
technology companies went public, raising a total of $1.9 billion in
gross offering proceeds, according to research provided by
Dow Jones VentureDeal. Of those companies, most did not fare well after their shares had begun trading, which isn’t a positive sign for other companies waiting in the wings.
A successful IPO requires demand, or pull, on the retail side, among large mutual funds, brokerage clients and everyday investors to drive up prices and keep them up. Right now, based on the performance of these IPOs, the public offerings may be more of a push by tired venture firms and shareholders hoping for an exit than pent up demand for technology offerings. However, the immediate performance of firms like Tesla, which rocketed up 40.5 percent on its debut in June, shows that a name brand can help. Tesla hasn’t maintained its high, but is still trading above its opening price of $19.
As Om has written, Facebook may be smart to wait for its IPO. Benefitting from its own brand recognition is perhaps one reason that Skype is filing, with the other reason likely the need to prove its value after being bought from eBay by PE investors last September . Digital Sky Technologies, the Russian firm that holds shares in Facebook and Zynga, is also reportedly looking to cash out on recent interest in its dealmaking; In late July, it was rumored to have hired Goldman Sachs in search of an IPO. Incidentally, Goldman is a lead underwriter for both Skype and Demand Media.
So far this year, there have been 22 actual IPOs in the technology industry — the most of any industry when tallying the 81 public offerings that actually made it to market — according to Renaissance Capital. As for filings, there have been 158 IPOs filed, a 444.8 percent increase from last year. However, of the tech IPOs that make it to market, the average first day return is a mere 7.1 percent, and the average total return is actually negative 7 percent, said Renaissance. That’s no Tesla.
The New Normal?
However, when figuring out the fates of the IPO market, it pays to have some context. As this chart from Renaissance Capital shows, the number of IPO filings isn’t anywhere close to the boom that occurred in the late 90s, but it’s approaching the level seen before the market crash in 2008. Given the amount of venture capital funneled into startups after the initial panic from the dot-com bust wore off, however, the return of the IPO market to the levels seen in 2004 and the early part of 2008 won’t be enough to sustain the VC capital invested in the last few years.
This means that even if we have a return of the IPO, we’re not likely to have a return of the boom that made dumping almost $27 billion a year into venture-backed startups from 2004 through 2008 feasible. So when Fred Wilson of Union Square Venture says that Skype’s IPO is “a monster” that will “get things going again,” I’m going to hold onto my doubts. Skype’s IPO may open the floodgates for hopeful VCs that need the IPO market — not just for exits, but to boost the valuations for their M&A deals — but I’m not convinced that the demand is there for non-brand name offerings, nor do I think Skype’s IPO has the potential to help sop up years of over-investment by venture firms.
Related GigaOM Pro Content (sub req’d): What the VC Industry Upheaval Means for Startups