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Tech IPOs: bet on risk and reward

Show me the product. That is the message Wall Street investors are sending to tech companies stepping up to the public trading block.

Show me the product. That is the message Wall Street investors are sending to tech companies stepping up to the public trading block.

This especially has been the case over the past few months, given the volatility lingering around the stock markets of late, analysts say.

Analysts note that investors are more likely to take a chance on companies that already have a product rather than companies touting the next big idea, because there is substantial risk associated with technology public offerings.

Case in point: RealNetworks (RNWK). The Internet streaming company's stock jumped past the starting line on its first trade, at 19-3/8, 55 percent higher than its set price of 12-1/2.

That triples the average first-day trade of tech stocks for the year, said Richard Peterson, an IPO analyst with Securities Data.

Back in May, tech IPOs bottomed out when the average monthly jump was just 8 percent. But while the monthly average rose to 18 in August, it has since taken a tumble. November's monthly average, as of yesterday, was 11.4 percent.

"It all comes down to product vs. concept," Peterson said. "Many investors are opposed to the conceptual company, and [their first trade] will do less well than those with an up-and-running product."

He added that conceptual IPOs pose a greater risk for investors because they have less of a track record and have higher barriers to overcome than companies with up-and-coming products.

There are few industries that can achieve top- and bottom-line growth as fast as those in the tech sector, said David Menlow, president of the IPO Financial Network. He explained that the industry's short product cycles lead to quick revenue-generation. Additionally, the potential for tech companies to ease their product into the industry standard, as Netscape did with its Web browser, offers incentive to put money into tech companies despite risk.

"The market place is more apt to jump in with both feet," Menlow said. "If you give $100 million to produce a company, they are going to expand, but when you give it to a high-tech company, it has the opportunity to become a platform because there is tremendous vertical integration."

Menlow added that, once the market volatility overseas settles down, people will feel more comfortable putting their money into newly public companies.

"When the stories stop coming out about the Far East, even though there may be other problems, once they get further down in headlines, the anxiety will start to disappear," said Menlow, explaining that the media attention focused on those markets contributes to the current jittery environment for tech IPOs.

Peterson, however, said that, rather than affecting the whole market, Asia's markets are only a factor for tech IPOs if those companies preparing to go public have facilities or a big chunk of business generated in East Asia. Otherwise, he said, Far East markets won't have much impact on the success of tech launches.

So far this year, there have been 140 tech IPO deals, which generated $6.1 billion. Forty-one tech IPOs are scheduled to launch before the end of the year, which would bring the total to 181. That compares with a total of 225 deals last year, which generated $12.4 billion. One of those deals was Lucent Technologies (LU), generated $3 billion through its offering.