Outlook Good

Investors are hot for shares of publicly traded small businesses, which were stock market stars last year. Entrepreneurs who took their companies public this past year say the arduous process was well worth the effort. Eighty-seven companies with annual sales between $1 million and $100 million held their IPOs in the first three quarters of 2007, according to data compiled for Entrepreneur by research firm Renaissance Capital. As of September 30, those small-company IPOs had an average 16.1 percent return, beating Renaissance's index of recent IPOs, which had a 13.1 percent return. Renaissance principal Kathleen Smith attributes the strong showing to investors' interest in fast-growing businesses and tech companies--descriptions that fit many of the smaller companies that went public.

These small firms' IPO success may seem alluring to other growing businesses in search of capital. The 15 best-performing small companies in the study (see chart, opposite page) raised more than $800 million in their IPOs. But be warned: Preparing for an IPO is expensive and time consuming, and it involves public disclosure of company financials.

It cost Aruba Networks Inc. in Sunnyvale, California, more than $3 million to prepare for its IPO, says co-founder Keerti Melkote, 38. And that's not counting months of executive time spent prepping and traveling to meet with prospective IPO investors in the U.S. and Europe. Aruba had to audit years of company financials, hire a CFO and add three independent directors to its board. Still, Melkote says going public was worth the trouble for the credibility his 5-year-old company gets from being publicly traded. "Our customers are Fortune 500-type-enterprise customers," he says. "They want to know that they're buying from viable companies."

Going public doesn't necessarily mean company founders lose control of the businesses they created. In its $95 million IPO, Boston energy software company Enernoc Inc. sold only a 22 percent stake in the company, says co-founder, president and COO David Brewster, 36.

Based on the success of last year's IPOs and the volume of recent filings, Renaissance predicts that the warm Wall Street reception for entrepreneurial company stocks will continue through the year. Smith says there's a high volume of recent filings from small companies planning IPOs, and there should be strong interest from investors, as last year's crop performed well.

Recent regulatory changes at the SEC, which governs public markets, should also help entrepreneurial companies looking to go public, says Steve Bochner, partner at Wilson Sonsini Goodrich & Rosati. He predicts that the relaxation of key rules that proved costly to smaller public companies will likely cut future costs.