Vonage carries burden of tech IPOs

* Mature companies have been hogging venture funding, leaving younger outfits cash-starved.

Private IT and network companies itching to become something more - through an IPO or being acquired by a larger company - have had limited options in the past few years. Those companies and the venture capitalists who back them are looking to the pending Vonage IPO to help renew investor interest in technology stocks.

In February VoIP service provider Vonage filed papers to prepare for an IPO with the U.S. Securities and Exchange Commission (SEC), saying it hoped to raise close to $250 million. Such an event could create a muchneeded buzz around technology stocks and entice more private companies to attempt to go public, as happened when Google made its long-awaited entry on the public market in 2004.

"A successful Vonage IPO would indicate renewed public market interest in growth tech stocks," says Theresia Gouw Ranzetta, general partner with venture capital firm Accel Partners, pointing out in late April Vonage updated its SEC filing, saying it intended to raise $500 million - double the amount it specified in its February filing - by selling 31 million shares for $16 to $18 per share. "That indicates that the public investors are showing a willingness to increase the risk in their portfolios in exchange for high growth in exciting new tech sectors such as VoIP," she says.

Since Vonage's filing, at least three other companies - wafer foundry Jazz Semiconductor, WAN optimization appliance-maker Riverbed and Web analytics company Omniture - have filed pre-IPO papers with the SEC, Gouw Ranzetta notes, demonstrating "early signs of potential renewal in the IPO market."

Going public makes a company seem more legitimate in the eyes of potential customers, given that an IPO raises cash that can be pumped into improving the company's offerings, and there's less room for business mistakes because public companies are regulated by the government and beholden to their shareholders. It means more venture capital is available to flow into younger companies, which is what the industry needs today, observers say.

"More mature [private] companies are far and away capturing the bulk of the capital at this time," says Mary McDonald, vice president of investment banking at Thomson Financial. That means there's less venture fund money to spend on start-ups, and that means companies with less than adequate or no funding may never be able to bring their products to market. "It's reasonable to assume this somewhat declining trend in early-stage activity is likely to have some impact down the road," adds McDonald.

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Cara Garretson is senior editor at Network World. Reach her at mailto:cara_garretson@nww.com
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