The Providence Journal Company did it in 1996, after 167 years of independent operation. At about the same time, Bacou USA and First Financial Corp. did the same. Providence-based Internet Service Provider Log On America did so successfully a year ago. Many of the rapidly emerging dot.com companies thirst for such an opportunity – the opportunity to go public.
The initial public offering (IPO) is “an opportunity for the existing investors and participating venture capitalists to make big profits, since for the first time their shares will be given a market value reflecting expectations for the company’s future growth,” according to Barron’s Financial Guides.
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Companies make IPOs for a variety of reasons, but the most common is to raise money. Sometimes that money is used to expand the company. Sometimes a company’s founders have decided that it is time to “cash in” and move on to other projects – the lure of venture capital too great.
Back in 1996, when the Providence Journal Company was in the process of its IPO, industry analysts pointed to a healthy stock market and the fact that record-high valuations had resulted in a public more willing than ever to buy common shares of companies.
Another theory suggested that corporate downsizing meant that a lot of talented people were suddenly looking for jobs – looking for opportunities. And they were armed with more than just ideas and time – they were armed with experience, making them all the more attractive to investors and venture capitalists.
Today’s volatile market has spurred similar IPO activity, but the results seem to vary.
In many cases, it’s a hot market nationwide. The economy remains strong. There is money to be had.
Jack Colombo is editor of the Miami-based Income Securities Newsletter. He said there has long been a rule of thumb when it comes to companies considering an IPO.
”If you can get them, you don’t want them,” he said. “If you can’t get them, you want them.”
Colombo tells the story of a start-up high tech company near his office in Miami. The company has six employees. Recently, its founders brought to an investor plans for an IPO in which they hoped to raise $1 million in capital. The investor said $1 million wasn’t available – but about $10 million could be if they came back with a different plan.
”That’s the kind of money that is out there,” he said.
But Colombo sees a very clear downside in the race toward IPOs. The competition is great. The incidents of failure, great as well.
“They all have a high burn rate,” he said. “If the revenues and the profit margins are not there”
Colombo sees difficulties, for example, among the growing list of retail dot.com companies.
”Almost all of the retail dot.coms are losing money – and will for the foreseeable future,” he said.
Why are they losing money?
“Whoever has the cheapest price wins,” said Colombo.
And not everyone can have the cheapest price.
Going public is not always an easy road. Some companies start down it, only to retreat.
Furniture.com Inc., for example, a Framingham, Mass.-based company that sells home furnishings over the Internet, reported recently that it is examining financing options other than its proposed IPO after an overall slump in Web retailers’ stocks. The company said it might proceed with the IPO at a later date.
Paul Zigman, a partner at Ampersand Ventures, a Boston-based venture capital firm, said the best opportunities for some companies to proceed with an IPO remain available – but may not be available to them for as long as they have in the past.
“If you can still make it through the IPO window, it may be the best route,” said Zigman. “But in some cases, that window is closing – and closing completely.”
Zigman said the traditional model in venture capital has been that an entrepreneur raises money, builds a company – and maybe three years down the road lands a venture capital investment, and then shoots for an IPO. More recently, he said, that model changed. The entrepreneur, he added, raised money in hopes of issuing an IPO within six months of being founded.
But that is the case no more
“You’ve got a lot of companies that are sitting in people’s portfolios who were not able to get out that window,” said Zigman. “They’re burning money like crazy and they’re going to need more.”
Zigman sees the window of opportunity – in terms of attracting venture capital and ultimately going public – more ajar in the field of telecommunications. Like Colombo, he’s not so bullish on the Internet retailers.
Zigman does see a move back to the “older days” of a few years ago. Companies being build over a period of years, not months.
“You’ll build a company and even if it is not going the IPO route, it will still be very attractive as an acquisition,” he said.
