From the June 2001 issue of Entrepreneur

Ah, 1999. The days when companies were going public like raindrops, and stock prices were soaring through the roof before the sound of the opening bell had even faded. The days when young companies counted the minutes to their IPOs and then reaped the multimillion-dollar benefits.

"An IPO was a cheap and easy way to raise money," says Nick Hanauer, a founding partner of Seattle-based VC firm Second Avenue Partners and an early investor in Amazon.com. "The markets were frothy and irrational."

Skip ahead to spring 2001. Those heady days of 1999 now seem like a distant memory. Of the 717 IPO filings in 2000, according to business Web site Hoover's Online, 201 never saw an opening bell. In fact, by fall 2000, more companies were filing to withdraw their IPOs than were filing to go public. This year hasn't fared much better: More than 50 companies withdrew their offerings before March alone. While only a short time ago there was a mad scramble to pick up new offers, even if they were overvalued, burned investors now run from anything that smacks of an IPO. AltaVista is just one high-profile name to pull its offering in recent months as a result.

Those Who Dared

Companies going public in this climate are finding that things certainly aren't what they used to be. Take Loudcloud Inc., the Silicon Valley tech company founded by Marc Andreessen of Netscape fame, which went public in March only to have its shares immediately fall below the IPO price of $6 per share. The company's market value was estimated at $450 million, a far cry from the $1.3 billion Andreessen wanted.

"The market is awful," says Mitch Mumma, a general partner with VC firm Intersouth Partners in Durham, North Carolina. "Companies that were considering going public a year ago aren't considering it now."

For companies that are holding back, it's a waiting game. Here are the stories of three that pulled their IPOs late last year--and how they're hanging tough until the market improves.

:: The Party's Not Over
1. What Now?
2. Get A Grip
3. Take My IPO...Please!

Mission Aborted

For Greg Gianforte, founder and CEO of Internet customer service software firm RightNow Technologies Inc., going public had been the goal since founding the company in 1997. "It was a logical step in the growth of the business," says Gianforte, 40. The Bozeman, Montana-based company filed its S-1 in April 2000 and hoped to raise $48 million from the offering for working capital and to expand its sales and marketing presence internationally.

Months after the filing, however, investors' receptivity to IPOs had gone from cool to frigid. "There were four or five months where it was going to happen next week," Gianforte says. "We were like expectant parents waiting for the time." It was on a private jet en route to an October road show appearance when Gianforte finally decided to pull the plug. "I said, 'Nope. Take us back to Bozeman.'" The plane turned around, and RightNow's IPO offering was withdrawn the following month due to market conditions.

The company was in a condition of its own. While revenue in 2000 was up 450 percent with sales at $26 million, the company had incurred expenses of $30 million in sales and marketing, administration and other investments, including $1 million spent gearing up for the IPO. The staff went from 130 to 350 employees within a year. Says Gianforte: "The IPO would have meant a larger cushion. Not going public raised the importance of profitability."

The new strategy in lieu of the IPO? First, find money some other way. Gianforte and his management team completed a $15 million second round of VC funding in late December with such VC firms as Credit Suisse First Boston and Greylock--no small feat in the current climate. But the company's rapid growth made things easier. "Raising money was not a problem. We made two phone calls," says Gianforte. RightNow will use the money for sales and marketing and product development.

The lack of an IPO also renewed focus on expanding the company's customer base. First, when the expiration date for two-year software subscriptions came up in the fourth quarter of 2000, the company secured renewal for 100 percent of them, despite a 250 percent price hike due to increasing functionality. Then the company surpassed 1,000 clients in January, adding AT&T, Hasbro, Reuters and the U.S. Postal Service to a client roster that already included names like Motorola, Nortel and Xerox. The company is executing the same business plan, Gianforte says, but with a closer eye to expenses and faster return on investment. "We're refocusing on the cost-saving aspects of our products, on the savings we can deliver to our clients." He expects RightNow to be cash-flow-positive again by the end of the year.

The biggest challenge may be internal. Although there were no layoffs after the lost IPO, "I wouldn't be telling the truth if I said employees were ecstatic [about not going public]," Gianforte says. He is confident the company will take another stab at an IPO when the market improves. But for the near term, he touts a new mantra: "It's a great time to be a private company."

2000'S WORST RETURNS
CompanyOffering PriceYear-End Price% Change in Price
Pets.com
(PET)
$11.00$0.09-99.15%
HealthGate Data Corp.
(HGAT)
$11.00$0.19-98.30%
Varsity Group Inc.
(VSTY)
$10.00$0.09-98.13%
QS Communications AG
(QSC)
$25.20$0.56-97.77%
ImproveNet Inc.
(IMPV)
$16.00$0.38-97.66%
Talisman Enterprises Inc.
(BATTQ)
$5.00$0.13-97.50%
AsiaContent.com Ltd.
(IASIA)
$14.00$0.38-97.32%
Uproar Inc.
(UPRO)
$33.88$0.97-97.14%
Netpliance Inc.
(NPLI)
$18.00$0.53-97.05%
Opus360 Corp.
(OPUS)
$10.00$0.31-96.88%

A Certificate It Won't Sell

When GiftCertificates.com filed for an IPO in June 2000, it hoped to raise $50 million for sales and marketing, purchases and acquisitions, capital, and alliances.

But the offering was pulled in mid-November. "By June, the market had already begun to turn against companies doing business on the Internet," says CEO Michael Ahern. The company didn't want to take the risk of being undervalued, and timing wasn't optimal during the SEC-imposed quiet period as the holidays approached.

Now Ahern, a former Microsoft executive who replaced founder Jonas Lee as CEO last October, is restructuring the company. GiftCertificates has 4,000 corporate clients and partnerships with 700 merchants representing 800 brands, including Bloomingdale's and TGI Friday's.

While the company did $65 million in sales in 2000 (a 250 percent increase over 1999), its debt stands at around $90 million, due in part to last year's acquisition of two of its competitors, Seattle-based GiftSpot.com and Omaha, Nebraska-based GiftPoint.com. The company's staff has ballooned to 350. "We realized we hadn't [focused] on efficiency during the mergers," says Ahern.

WHAT A DIFFERENCE A YEAR MAKES
Fourth quarter 1999:158 IPOs at a total value of $47.2 billion

Fourth quarter 2000:56 IPOs at a total value of $15.1 billion

SOURCE: Hoover's Online

The new strategy? Cut back, and increase efficiency. The company let 70 employees (20 percent of its staff) go in January to minimize operating losses. The company also moved its main offices from pricey Manhattan to frugal Carlstadt, New Jersey. (Satellite offices in Omaha and Seattle remain open.) "We have one sales and marketing team, whereas we had two or three before," Ahern says. Additionally, the company decreased its advertising spending to about $1 million per quarter, a far cry from its days of having prominent billboards in Times Square and Sophia Loren as a spokesperson.

Securing additional funding also became a matter of urgency. In November, the company received $13 million in its fourth round of venture financing from a variety of VC firms. During the second half of 2000, GiftCertificates raised an additional $50 million in private venture equity.

Partnerships are also an important part of the company's growth strategy. In November, it signed an agreement with AOL that lets AOL subscribers purchase from GiftCertificates via AOL's site. Later that month, it did the same with Yahoo!, creating http://giftcertificates.shopping.yahoo.com, where online shoppers can purchase gift certificates from a variety of retailers.

Still, rumors are flying in Internet chat rooms about the company's possible near-term demise due to its financial situation. Ahern deflects the rumors and says he expects the company to be cash-flow-positive by the end of this year. He may consider taking the company public when the market rebounds. "At some point, it will make sense for us to go back to the public markets," he says. "But it's more about when the public markets are ready as well as when we're ready."

SNAPSHOT OF A DOWNSLIDE
Year 2000 started well, with lots of companies getting ready for IPOs. The trend spiked in March, but by year-end, more companies were filing to withdraw than were filing to go public. Here are the numbers for the entire year:

Total number of IPO filings in 2000:717
Total number of IPO pricings:431
Total number of IPO withdrawals:201

SOURCE: Hoover's Online

A High-Ranking Private

When Web development firm Logical Design Solutions Inc. filed for an IPO on March 30 of 2000, it hoped to raise around $56 million to pay off some debts, fund sales and marketing efforts, and expand the company through methods such as acquisitions.

But instead, after months of testing the market, the company pulled its IPO on December 20. "At the time, we [thought an IPO] was a good move for the business," says president and CEO Mimi Brooks, 41, a former AT&T executive who founded the Morristown, New Jersey-based company in 1990. But the slowing market gradually changed Brooks' mind.

Brooks says the IPO would have ensured the continuation of the company's rapid growth. In the first half of 2000, the company's revenue increased from $6.6 million to $16.7 million, and operating income rose from $400,000 to $3.9 million. Local Design also had some minority equity investments through VC firm Summit Partners that it was planning to pay back if it had gone public, says Brooks.

I'LL PASS, THANKS
Number of IPOs withdrawn between January 1, 1999, and March 20, 1999:10

Number of IPOs withdrawn between January 1, 2001, and March 20, 2001:57

SOURCE: Hoover's Online

While the company's run at an IPO didn't incur a chaotic financial crisis after the offering was pulled, Brooks says its business model still took a more positioned approach coming into 2001. She became focused on reaching aggressive revenue targets. "Our tactic was to go heads down and run the business," Brooks says.

The company also revamped its broad marketing messages to focus on its enterprise portal expertise and to home in on the buying habits of its Global 1000 clients, a list that includes MetLife and Time Warner. "We're on the ground with our clients and are communicating more," Brooks says.

The company didn't see any need for layoffs, and it hasn't taken any VC funding so far this year. According to the company's addendum, it closed 2000 with $34 million in total revenue on about 13 percent profitability. Business is expected to grow 25 percent over 2000, Brooks says. "We're in the top end of our space."

Brooks is at peace with the company's decision to pull its offering and isn't contemplating another try this year. "We closed that chapter when we pulled our IPO in December," she says. "For now, I'm happy to sit under the radar screen, below all the noise."


Chris Penttila is Entrepreneur's "Staff Smarts" columnist.

Contact Sources

Intersouth Partners

Logical Design Solutions Inc.
(800) ASK-LDSI

RightNow Technologies Inc.
(877) 363-5678

Second Avenue Partners
info@secondave.com