IPOs: nothing to offer

Contact: Brenon Daly

Security vendor ArcSight marked its first full year on the public market with an unexpectedly solid fiscal third-quarter report Thursday. (That said, my colleague Nick Selby reads between the lines and sees some potential problems at the company, which now sports a market capitalization of nearly $350m.) Heading into the release, ArcSight shares traded essentially where they did when they hit the market last February, though an after-market rally pushed the stock above $11 for the first time in seven months.

The fact that ArcSight is now above its offer price is nothing short of astounding, given that both the Nasdaq and the Dow have nearly been cut in half since the debut of the security company. (Rackspace, which was the only other VC-backed tech IPO in 2008, has likewise been cut in half since going public last summer.) It’s telling that we have to limit our discussion about the IPO market to after-market performance, rather than new issues. Not to put too fine a point on it, but we all know that the IPO market is dead right now. (As if to reiterate that, GlassHouse Technologies on Thursday pulled its planned $100m offering, which it filed in January 2008.)

And even when the market opens up once again for debutants (and we think that date is a long time off), it will almost certainly provide even fewer exits for VC-backed companies than in the past. Sandy Miller, a general partner at late-stage venture firm Institutional Venture Partners (IVP), recently noted that roughly one-quarter of IVP’s past exits had come through an IPO. (Included in that number is ArcSight; IVP was its second-largest holder before the IPO.) In the future, however, Miller projected that the percentage of portfolio companies exiting to the public market would drop to ‘single digits.’