The IPO Market May Be Back in 2010-CFO.com

As the new year approaches, finance chiefs at young firms are hoping for a revival in the long-depressed market for initial public offerings. There have been some positive signs of late: 32 IPOs have been launched in the current quarter through December 16, more than 10 times the volume of last year's final months. But weakness remains: seven companies pulled their offerings in the quarter because of lack of interest, and five of the six stocks that debuted in December priced below expectations.

In this skittish market, confidence in a company's ability to hit its numbers is more important than ever when thinking about going public, said Benjamin Nye, a managing director at Bain Capital Ventures and one of five dealmakers participating in a recent Directors' Roundtable panel discussion on evaluating IPOs. "Missing your first quarter out of the box sets you up for capital punishment in the market," he said. "If you don't have visibility into the business, don't go public."

John McCarthy, finance chief at biotech company Microbia and a fellow panelist, agreed that managing investors' expectations is "paramount." Yet providing reliable guidance is often challenging for a young business, and has only grown more so in today's volatile market, he added.

Setting reasonable expectations is critical from the earliest stages of the IPO process, concurred the panelists. Bruce Armstrong, a managing director at private-equity firm TA Associates, said it can be challenging to work with management teams to determine a company's value prior to a public offering. "It's easy for people who are very tied up in a business personally to want to believe in a higher valuation, but they're setting themselves up to fail," he said. "If you go out high, it's hard to meet those expectations."

"You're always going to get credit from Wall Street if you underpromise and overdeliver," added Marc Thompson, head of software investment banking at Oppenheimer & Co. "If you forecast 40% top-line growth, you may not necessarily get credit for all of that, but then you're under pressure to deliver it."

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