Stock turbulence is worrying for IPOs
The initial public offerings of several prominent Boston-area companies this year were supposed to be the first in a series of success stories for the region’s blossoming crop of startups.
Now, after a wild week of ups and downs on the stock market, leaders at Boston’s IPO-bound technology companies are privately weighing whether to delay, according to their investors.
“For companies on the precipice of going public, it’s a deep concern,” said Jeff Bussgang, a partner at Flybridge Capital Partners. “IPOs require calm markets.”
Bussgang and other venture backers would not comment specifically on any of the companies in their portfolios. One business backed by Flybridge, digital marketing firm dataXu, is among a handful of local tech outfits that analysts say will try to go public within the next year. Others include Waltham data-storage company Actifio Inc., Burlington-based software firm Acquia Inc., and cybersecurity companies Bit9 Inc. and Veracode Inc.
After hitting an all-time high of 17,279 in mid-September, the Dow Jones industrial average entered a steep dive late last week that bottomed out at 16,117 Thursday. On Friday, the index clawed back to 16,380, though that leaves the Dow slightly down on the year.
As the next wave of companies consider going public, the experiences of two marquee Boston-area companies that concluded IPOs in the past few weeks don’t offer easy lessons.
Shares of Boston-based online home goods retailer Wayfair floundered after a strong opening, sinking as low as 22 percent below its initial $29 price before rallying somewhat Friday. But digital marketer HubSpot has mostly been riding high, its shares remaining well above the IPO price of $25.
Some investors cautioned against drawing conclusions from Wayfair’s and HubSpot’s performances so far.
“Is this is a sneeze, a cold, the flu? No one knows yet,” said Maia Heymann, senior managing director of Cambridge venture capital firm CommonAngels Ventures. “Great companies that are growing and hitting their plans can get out even in choppy markets.”
The market turmoil comes amidst a bumper crop of IPOs. According to Renaissance Capital, 316 companies have filed to go public so far this year, compared to 256 in all of 2013.
Heymann and other investors are counseling against panic. They say the recent market dive is unlikely to be a harbinger of a larger collapse, and that a healthy dose of skepticism keeps bubbles from forming. Some investors even use the market turmoil to remind entrepreneurs to make sure their companies are in sound shape.
“What this really requires them to do is make sure the fundamentals are there: the numbers, the story, the positioning,” said Sean Dalton, a partner at Highland Capital Partners. “If you’re not there, this is a chance to slow things down a little bit and make sure you address those deficiencies.”
In going public, investors said companies must consider factors including how much money they have on hand now, the size of their company, and how well-known their brand is.
Larger, established companies have it easier; they’re less likely to be blown by daily market winds. But for smaller companies, getting IPO timing right can be a life-or-death decision.
“If you’re a smaller company and your stock goes south on the first day, a lot of shareholders will just dump,” said Ben Howe, chief executive of investment bank America’s Growth Capital. “To get them back in and committed after you’ve disappointed them like that is really hard.”
Investors noted that an IPO is an expensive and potentially distracting challenge. Companies must satisfy regulatory requirements, carefully manage shareholder expectations, and spend time on the road schmoozing investment bankers and potential investors. The further along a company is in that process, the more likely it is to complete an IPO, whatever the market conditions.
For pre-IPO companies that decide to wait, the delays may be especially frustrating because market volatility is often triggered by remote events that have little bearing on their business. “If you’re the CEO of a private tech company, you can neither control those things or let yourself get too distracted by them,’’ Bussgang said.