You know it's a weak IPO market when a hot technology company prefers Bono to the Nasdaq.
That's what Yelp did when it raised $25 million in late January from a venture capital firm whose investment team includes the lead singer from U2. The online business-listing service, thought to be a prime candidate for an IPO, now won't go public until late next year at the earliest.
"We will do an IPO when it makes strategic sense," Yelp CEO Jeremy Stoppelman said recently.
This was supposed to be the year when initial public offerings made sense again following the worst drought since the 1970s. After all, the Standard & Poor's 500 is up more than 60 percent since March, and the economy is improving.
But so far, executives at would-be IPO candidates are playing it safe — another sign that this is a bull market that doesn't feel like one.
That reluctance to go public comes with consequences that go beyond the stock market.
"Where this really hits: job growth," said Mark Heesen, who heads the National Venture Capital Association, an Arlington, Va.-based trade group. "After companies go public, that's where they add 90 percent of jobs."
Companies issue common stock to the public as a way to raise capital, which they use to expand their operations or pay down debt. The payoff can be huge for the founders and early investors, like the venture funds. Billionaires born from past IPOs include Microsoft's Bill Gates, Amazon.com's Jeff Bezos and Oracle's Larry Ellison, to name a few.
The market for stock offerings collapsed during the financial crisis in late 2008. Young companies — like their larger and more established rivals — faced plunging sales and profits, making them unattractive to investors.
There was one U.S. IPO in the fourth quarter of 2008 and two in the first quarter of 2009, the worst IPO volume in four decades, according to IPOHome.com, which tracks data on stock offerings.
By the end of last year, 63 IPOs got done, a dramatic rebound but still less than a quarter of the offerings done at the height of this decade's market in 2007.
The gains in late 2009 came as stocks and the economy surged. Signs of life in the IPO market were welcome since bank lending is still tight and financing from venture capital firms has plunged to the lowest level in more than a decade.
Yet five weeks into the new year, so far 2010 is a disappointment.
Eight companies have gone public in that time, an improvement from the one offering done at this point last year, according to IPOHome.com.
But the newly issued shares have fallen by an average of 5 percent, and that's happening even after half of those offerings were priced below what the companies had initially hoped to get for each share sold. One, Ironwood Pharmaceuticals, priced at $11.25 per share for its IPO on Wednesday, below the range of $14 to $16 its underwriters had hoped to get.
Three companies have postponed their IPOs and one withdrew.
"Are we open for business? Yes," says Kathleen Smith, a principal at Renaissance Capital, which runs IPOHome.com. "But we've seen a week's worth of bad trading and that certainly does make people nervous.
"Investors are being very selective and demanding discounts to buy," Smith says.
Some companies are steering clear of an IPO for now, putting themselves up for sale or trying to get funds from other sources.
"I am seeing more managers managing like their companies are going to be acquired rather than have an IPO," says Tom Kinnear, who leads the University of Michigan's Zell Lurie Institute for Entrepreneurial Studies.
Yelp was talking with Google about an acquisition, but that fell apart late last year. It then secured $25 million from Elevation Partners, its fifth round of financing from the venture capital firm.
Yelp plans to use the money to expand the reach of its Web site, where people post and read reviews about restaurants and other local services and businesses. Its site drew more than 26 million visitors in December.
Stoppelman, the CEO, said the costs of being a public company and the pressures to constantly please investors influenced his decision. Now, he'll wait until the company needs capital or stock to make acquisitions before considering an IPO.
A key test case for the IPO market could come with the much-hyped offering for electric-car maker Tesla Motors Inc., which announced in late January its intention to go public.
Tesla has notoriety. Its high-end Roadster, an all-electric sports car that retails for $109,000, has plenty of buzz and is popular with celebrities. Profits, however, have been more elusive. The company has accumulated $236.4 million in losses since being founded in 2003.
So far the Palo Alto, Calif., company hasn't disclosed how much it plans to raise, how many shares it would sell or when it plans to offer them. If the IPO successful, it could be a turning point for public offerings, even the broader market.
Let's see how well this sports car rides.
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