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No quick comeback for tech IPOs

Technology IPOs are expected to hibernate at least through the first half of 2001, according to industry experts, who don't see a revival until the second half of 2001.

In "Exploring the IPO Pipeline," Red Herring's roundtable discussion in New York Tuesday, panelists said IPOs are dead on arrival.

"For now, there is no IPO market," said Tom Meredith, managing director of Dell Ventures. According to statistics he cited from Goldman Sachs, only seven deals might sneak out in December, as opposed to the average of two a day that flew out the door in December 1999.

There's a slight possibility that some really good companies will get out in the first half of 2001, but most companies will have to wait until the second half, Meredith added.

"The chances of having a completely closed market are low," said Jerry Murdoch, managing director at Insight Capital Partners. "But there will be a very high bar for those that attempt to go."

This is a radical psychological shift for investors, who, unless they've been around since the 70s, when only two or three IPOs came out a year, have never seen a closed market, said Mike Brooks, general partner at Venrock Associates.

Tricky waters

It has been about 187 days since the market stumbled -- and on the average, corrections have usually only taken 49 days, said Pip Coburn, executive director at UBS Warburg. The whole market is operating on "a different psychology now," he added, "investors aren't buying into the dips."

One thing that's sure not to change in the coming year is the huge volatility; momentum investing is not dead.

"Even if we're on the precipice of a great canyon of decline, there'll be lots of plateaus -- windows to get things out," said Murdoch in a grim metaphor for how the IPO market will function should the Nasdaq continue its descent.

Since the market tanked in April, Insight has put out five IPOs -- it expects to get out just one or two in the first quarter, Murdoch said. Despite his dour predictions, Murdoch says his firm isn't suffering much, and has a strong portfolio. Of 50 companies it is preparing for the public market, only four will need funding by January; the rest are set to reach profitability without assistance.

But deals that are profitable, have strong management, and have already made a name for themselves will make it out the door, the panelists agreed.

"It better be Transmeta or Loudcloud, otherwise only an idiot would suggest buying into an IPO now," Coburn quipped.

The panelists also agreed that there isn't going to be much happening overseas until the U.S. market revives. "The Nasdaq is a billboard for technology globally," said Meredith. Asia's market just followed the U.S. curve, and so does Europe's for the most part, though there are a few interesting wireless deals that could come out, he added.

The same tricks

The short-term interest of investors has pressed the idea of the "hot" new sector for the past year, but no more, the panelists said.

"Next year there won't be so much pressure to pull the next rabbit out of our bag of tricks," said Coburn. "Themes in ྟ and 2000 are the same ones that will come back -- broadband, optics... on the software side it's questionable. There'll be no more waiting seven to 10 quarters to show a profit," he added.

Other categories mentioned were bricks and clicks, wireless, and healthcare, which along with other non-tech companies, may be more of a force in the IPO market in the coming months. Meredith said that Dell was increasingly investing in non-technology companies; aside from using its investment arm to invest in technologies the company can use.

"I'd describe what we're seeing as the revenge of the non-nerds" said Coburn -- three or four quarters ago, you had a bit of jealousy from non tech towards tech people in the business.

Mercenaries to Missionaries

A member of the audience asked if the current situation with "dot-coms" doesn't parallel to the junk bond fiasco of the 1980's -- with people in the industry conspiring to cheat investors.

While all the panelists agreed that this was an extremist position, and that investment banks, not VC firms would shoulder the blame anyway, they did concede that VC firms may change some strategies in the year to come.

We're moving from being mercenaries to missionaries, said Meredith; "first we were investing on momentum, now we're investing with purpose."

"Investment banks decide who goes public, and who doesn't, and they were just following the law of supply and demand," said Murdock. There was too much demand, and a lack of supply. The same thing happened in the 19th century when four light bulb companies went public, but there was no electricity yet."

Another practice more VCs may engage in -- one that the panelists agreed raises an ethical question for the industry -- is practice of PIPES, or private investments in public equities. The deals can involve the purchase of common stock or convertible debt. The practice turns VCs into public money managers, something they're not meant to be, Benrock said.

The panel agreed that the VC landscape is changing along with the IPO scene, and that the market will continue to be volatile, but some thought the dearth of technology IPO's would last longer than the first half of 2001.

"For the next two years it's like we'll be building a bridge to the New World. Right now we think its going to collapse. But it won't. We'll get there. It’s the pace that's in question," Meredith said.

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