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IPOs: Here's the Beef
New offerings may be heating up. But companies built on little more
than a pipe dream aren't getting out of the gate.
By Cory Johnson
Even on the busiest days, followers of initial public offerings can usually keep score pretty easily. But last
week, only a circus freak could count the daily IPOs on one hand, with six deals on Tuesday, eight deals on Wednesday,
seven Thursday, and as many as 14 scheduled for Friday.
Freakier still, a new IPO logic has taken hold – yes, actual logic: The only companies making significant debuts
are companies with a market clearly in hand. With an eye-popping 35 companies across all industries going public
last week (only three weeks in Wall Street history have ever seen more new issues) the new rule is this:
IPO-funded
pipe dreams are a thing of the past.
Internet companies without a clear market for their products aren't getting out of the gate. Call it a new marketplace
must – if there's no there there, there's no IPO there.
"The days of story stocks being capable of going public are long over," says Gail Bronson, a Silicon
Valley startup executive. Investors are looking for proven sustainable markets, not just proven sustainable businesses.
It's not just that Wall Street is biased against any sort of Internet content or Internet commerce company – that's
too simplistic. Yes, 1-800-Flowers.com, Fogdog
(FOGD) , Pets.com and, finally, Amazon.com (AMZN) , are suffering.
But AOL and Yahoo (YHOO) continue to thrive, and both are involved in content and e-commerce. Internet infrastructure
companies are doing well in the IPO market because their business is already strong and growing.
Take last week's biggest offering, McData. The networking company chalked up the week's largest deal, raising $350
million and rising 205 percent in its first day of trading. The rise isn't due to some notion of a potential marketplace;
McData chalked up a net income of $9.6 million on revenue of $103.6 million in the six months ended June 30 by
selling network switching and storage devices.
Wall Street recognizes that while the buildout of the Internet is happening now, the uses of the Internet are still
being developed. Perhaps better proof of that is companies that haven't been able to go public.
AnnuityScout.com is just the kind of company that would have rushed out of the IPO gate a year ago. The company
sells annuities online and offers them cheaper and with fewer strings than traditional insurance companies. According
to CEO Greg Yost, the company had $10 million in sales in the last two months, with sales doubling every quarter.
Yost is doing this by offering the kind of annuity products the insurance companies make little money on – variable
annuities without loads or surrender charges. It's the equivalent of a no-load mutual fund.
More important, the company is focused on a market that is already active online. "The boomers are booming,"
says Yost. "After pornography, their No. 1 concern is financial well-being. So our customers are already on
the Net – we don't have to wait for them to show up. Our research shows that people who own $1.2 trillion in annuities
are already on the Internet."
Yet with all this, plus a $9.3 million investment from Chase Capital Partners last spring, Yost notes his company
is nowhere near an IPO. "In this market, we're not ready yet," he says. "We're getting all the metrics
together and getting everything lined up. The market's appeal for certain sectors comes and goes, but it's pretty
clear to me that these days, we have to prove the model. It's not just the idea anymore; we can't go public until
we actually are showing that it works."
Indeed, until e-commerce and e-content achieve such results, it's likely that "show and prove" will remain
the rule of the IPO market.
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Cory Johnson is an editor at large at TheStreet.com.
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