Market Pulls Rug From Under IPOs?

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Market Pulls Rug From Under IPOs?
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The wild gyrations of the stock market last week did more than just spook investors, they unsettled L.A. technology companies hoping to take advantage of what had been the booming IPO market.

At least eight local tech companies are seen as candidates for an initial public offering in the near future, including online legal document provider LegalZoom.com Inc., people search engine MyLife and online retailer BeachMint. But if the markets don’t stabilize soon, those companies might lose their window for a public debut.

“No one wants to catch a falling knife,” said Ivan Nikkhoo, managing director of Santa Monica merchant bank Siemer & Associates, which specializes in technology and digital media companies. “Going public has a lot to do with certainty, and right now the certainty is out the door.”

The concern is more than theoretical. Amid the market turmoil, eight of 11 companies set to debut on U.S. markets last week, including Seattle lender HomeStreet Inc., delayed the pricing of their IPOs.

What’s more, Boston data backup company Carbonite Inc. slashed its pricing range by several dollars, which could portend problems for L.A. firms that already have filed for their IPOs but have not been priced. They include video game rental service GameFly, and a handful of other assorted companies, including two financial firms, Oaktree Capital Group LLC and TMAC Mortgage Co.

However, not everyone involved in the local IPO market believes that the market volatility will necessarily lead to lengthy delays to public debuts.

John Babcock, partner in the Santa Monica office of Rustic Canyon Partners, said his firm has invested in an L.A. company planning to file for an IPO this week. The company will move forward with those plans despite market volatility.

However, the company, which he would not name, is counting on the market stabilizing before the pricing in September or October.

“Obviously if we go through another two weeks of 500-point swings, it’s going to rattle people,” he said. “I guess we’ll all be a little wiser in a few weeks.”

IPO impasse

Technology was one of the first sectors to recover from the 2008 recession, and high-tech and social media companies have been instrumental in helping revive the IPO market.

In the last year, several local tech companies have made their public debut, including online content house Demand Media and business software company Cornerstone OnDemand, both in Santa Monica.

As public offerings have heated up, investment money has started to flow. Venture capital firms invested $380 million in 64 local digital media companies in the last year, according to a report from PricewaterhouseCoopers LLP.

With that kind of money in the hands of L.A. companies, industry insiders speculate that a number of them have been planning to take advantage of the hot IPO market.

Among them is LegalZoom, a Glendale-based website specializing in legal documents. The company raised $66 million from Menlo Park venture capital firms Kleiner Perkins and Institutional Venture Partners in April. Chief Executive Jason Suh told blog TechCrunch last month that an IPO is in the company’s plans.

Brian Lee, LegalZoom’s co-founder who left to start online retailer ShoeDazzle Inc., said he’s concerned what the market turmoil could mean for the IPO.

“LegalZoom is prepped and ready to go IPO, but market volatility will definitely affect that,” Lee said

He’s not as concerned about ShoeDazzle, a Santa Monica company that chooses accessories for customers based on their style preferences. The company raised $40 million in May in a funding round led by Menlo Park venture capital firm Andreessen Horowitz, bringing its total funding to $60 million. The company’s financing has led some to speculate that it could soon file to go public, but Lee said he’s focused on growing the business first.

It’s a reaction echoed by Jay Samit, chief executive of SocialVibe. The West Hollywood digital advertising company raised $20 million in a round led by Palo Alto’s Norwest Venture Partners, bringing its total to more than $40 million.

But Samit said an IPO is not the in company’s short-term plans, so market volatility doesn’t worry him yet. In fact, a struggling economy could mean more business for SocialVibe as brands look for cost-effective marketing, he said.

“The worse the market right now, the better we look,” he said.

Return on investment

Still, the slowing of the IPO market could mean that venture capital firms will have to wait longer for a return on their investments, which could hurt startups more than established tech companies.

Brandon Mills, co-founder of Santa Monica online marketing startup BlockBeacon, said that if venture firms tighten their purse strings, young companies could have a harder time finding funding.

“Companies looking to raise a seed round or a series A, those are the companies that will get cut (by the VCs) first,” Mills said. “It’s a completely irrational market, and we have to assume the worst.”

Babcock of Rustic Canyon said he doesn’t expect the volatile market to necessarily cut off the flow of investment as much as prompt critical looks at companies’ worth.

“There’s quite a bit to be excited about in the venture business,” he said. “What you’ll see is a push down on valuations more than contraction on spending amounts.”

Newly public companies that debuted during the IPO boom also weren’t spared during last week’s market sell-off.

Shares of Demand Media, which went public in January, hit their all-time low Aug. 8 when they closed down 9.7 percent to $8.36. Cornerstone OnDemand, which began listing on the Nasdaq in March, withdrew its plans for a secondary offering, citing adverse market conditions.

Nikhoo of Siemer & Associates said that the stock of those companies was especially vulnerable to market swings because the firms don’t have enough of a track record that investors can evaluate.

“Companies whose stock has been public for a shorter period of time tend to be more volatile because they don’t have the history,” he said.

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