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Local tech firms eschew IPOs in favor of venture capital

Rapid7 executives heralded the firm’s initial public offering by ringing the opening bell at the Nasdaq stock exchange on July 17.
Rapid7 executives heralded the firm’s initial public offering by ringing the opening bell at the Nasdaq stock exchange on July 17.

Summing up the IPO market for technology companies isn’t the toughest financial analysis that Scott Tobin has done this year.

“Pretty easy: It was a stinker,” said Tobin, a general partner at Boston venture capital firm Battery Ventures.

Initial public offerings from such companies in Massachusetts followed the national trend in 2015, which investment adviser Renaissance Capital called “a disappointment” across the board. The 170 IPOs recorded nationally this year raised just $30 billion, the lowest in six years, Renaissance said.

July’s public offering by Boston-based Rapid7 Inc., a digital security software company, was the only IPO of a tech company based in Massachusetts this year. That was a steep drop from the four local tech companies that went public in 2014: Care.com Inc., Hubspot Inc., Wayfair Inc., and Imprivata Inc.

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The 15-year-old Rapid7 was hardly a fast-rising tech startup when it went public. But it was still able to tap into the public markets in part because of its focus on digital security, a sector with increased interest from customers and investors following high-profile data breaches at major retailers and government agencies, among others.

Boston’s Bain Capital Ventures was one of Rapid7’s largest shareholders before it went public. Bain Capital Ventures managing director Ben Nye, a Rapid7 board member, said Rapid7 was “a little engine that could.”

“There was a period where I would have thought the company would have been acquired, just because it was such a nice business model and technology and market,” Nye said. “But they went right through that and ultimately grew to such a size that they were in a really nice IPO position.”

The state got a glimmer of a possible thaw in the IPO market as the year drew to a close. Acacia Communications Inc., a Maynard-based company that sells telecommunications infrastructure equipment and services, publicly filed paperwork for a public offering.

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The company, which was founded in 2009, reported $8.1 million in profits on nearly $171 million in revenues for the first nine months of 2015, an increase from the $2.3 million profit on $105 million in sales from a year earlier.

Cambridge-based venture capital firm Matrix Partners was the company’s largest stockholder, with 39 percent of the shares.

The lack of IPOs didn’t mean that tech companies were starving for cash, though.

One of the biggest drivers behind slow public offerings, analysts and investors said, was the relative abundance of private investment for growing companies. That makes it easier for executives to raise money while avoiding the glare of public-company regulations and Wall Street’s focus on quarterly financial results.

“Why be public if you could raise money at very healthy valuations for as long as you want?” Tobin said.

One of Boston’s most talked-about tech companies illustrates the trend well. While Rapid7 raised $103 million in its IPO, Boston-based fantasy sports provider DraftKings Inc. was able to raise about $500 million from private investors, valuing the company at about $2 billion.

Overall, Massachusetts tech companies saw their venture funding increase significantly in 2015. Research from venture capital research company Pitchbook showed nearly $2.1 billion in venture financing raised by software or IT hardware companies in the state this year, compared with about $1.2 billion in 2014.

The flood of late-stage financing may also be acting as a deterrent to going public. Companies that stay private longer can accrue high valuations. Yet if they went public those companies risk being worth less money because of the lukewarm interest in new tech stocks — those that did go public in 2015 did not perform all that well after their IPOs.

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Renaissance Capital singled out Boston’s Rapid7 as a cautionary tale: The company’s shares jumped 58 percent on its first day of trading. But as the year closed, Rapid7 shares were trading below their IPO price of $16.

“I personally believe that the notion of private companies raising so much money will have a long-term negative effect,” Tobin said. “I think it is important for there to be a healthy IPO market for everyone to participate.”


Curt Woodward can be reached at curt.woodward@globe.com. Follow him on Twitter @curtwoodward.

Clarification: This story was updated on Dec. 30 to clarify that Bain Capital Ventures was one of Rapid7’s largest investors.