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Innovation Economy

IPOs in a holding pattern

Start-ups are ready, when the market is right

By Scott Kirsner
Globe Columnist / June 13, 2010

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Filing the paperwork for an initial public offering is like buying the perfect bathing suit for a beach party. Yes, you’ve taken the first step by finding something to wear, but you still need people to show up at the party and warm weather, too.

Right now, the forecast isn’t phenomenal for the five Massachusetts companies looking forward to their day in the sun.

“There were some dumb people last year saying that 2010 was going to be a good year for IPOs — and I was among them,’’ said Peter Falvey, cofounder of Revolution Partners, a Boston-based investment bank. “As we’ve seen, the markets have been really unsettled, and when that happens, IPOs are the first thing that shuts down.’’

One of the most recent local offerings, Aveo Pharmaceuticals Inc., a Cambridge biotech working on a drug for kidney cancer, had hoped to sell its shares for between $13 and $15; the shares debuted at $9 in March and have declined since to about $7.50.

Despite the market conditions, a quintet of companies is lined up for their turn, repre senting diverse sectors of Massachusetts’ innovation economy: energy, consumer-focused services, life sciences, and technology.

■ Newton’s First Wind Holdings Inc. develops and runs six wind farms in states including Maine and Vermont, and has plans to build others; the company originally filed to go public in the summer of 2008, and it hopes to raise as much as $450 million, using the clever ticker symbol WNDY.

■ Zipcar Inc., based in Cambridge, operates the world’s largest car-sharing service, with more than 400,000 members who pay for convenient access to a fleet of 7,000 vehicles.

■ BG Medicine Inc. is a Waltham company developing blood tests for heart disease and multiple sclerosis.

■ GlassHouse Technologies Inc. of Framingham is a consultancy that helps its clients manage corporate data centers.

■ Ameresco Inc., also based in Framingham, helps customers manage their energy usage.

Of BG Medicine, Steve Dickman of the consulting firm CBT Advisors notes that the company’s tests haven’t yet won approval to be sold in the United States or Canada. “It’s a very promising technology platform, but it’s wishful thinking that they will be able to go public without significant revenue,’’ he wrote in an e-mail.

And Ethan Zindler, an analyst at Bloomberg New Energy Finance, said First Wind may also have a tough time.

“The economic downturn has led to a decline in electricity demand,’’ Zindler said, “and that has slackened the demand for new generating capacity, particularly for renewables, which are more expensive on a per-kilowatt-hour basis than fossil fuels.’’

But Zindler added that First Wind may be better positioned than other companies building new wind farms, since “a number of their projects are in the tightest electricity markets, like Hawaii and New England. They’ve been very smart about picking their spots.’’

Boston venture capitalist Todd Dagres believes that the healthiest IPO candidates are sitting on the sidelines for now. “There are about 25 private tech companies doing well over $100 million in sales, but no one wants to be the first penguin to jump off the iceberg,’’ said Dagres, founder of Spark Capital. “They’re waiting around for a more favorable environment.’’

The companies leaping from the iceberg, to use Dagres’s metaphor, “are the ones that have to go out right now to raise money. It’s an adverse selection market,’’ he said.

But Falvey at Revolution Partners notes that it can be helpful to have an S-1 document, the requisite paperwork for an IPO, ready for the moment when market conditions improve. “You can react quickly if there’s a market window,’’ he said. And in some cases, the S-1 can actually serve as an advertisement for potential acquirers. “The idea is, if you’re interested in buying a company, do it now, because once they go public, you’ll have to write a bigger check,’’ Falvey said. (That’s exactly what happened with New Hampshire-based EqualLogic Inc., acquired by Dell Inc. in 2007 for $1.4 billion as it was preparing to go public.)

Sometimes, said Ben Howe, chief executive of America’s Growth Capital, a Boston investment bank, the IPO merely “sets the stage for doing a secondary offering later, which could be at a much better price and raise a lot more money.’’

Howe said he recently talked to one venture capital firm that has 17 companies eager to file an S-1; yes, 17. Assuming that public market investors do develop an appetite for new offerings, what other Massachusetts companies could go out?

Last year, Kayak.com, the online travel shopping site based in Concord and Norwalk, Conn., generated about $150 million in revenue, and cofounder Paul English told me that “we’re trying to figure out timing’’ of an IPO. CSN Stores LLC, a Boston-based e-commerce company that sells everything from barbecue grills to exercise bikes, surpassed $250 million in revenue last year. Cofounder Niraj Shah said via e-mail that there may be a time when it makes sense to take the company public, but CSN is generating enough profit that “we don’t need extra capital to grow right now.’’ (CSN, amazingly, never took a penny of venture capital funding; the founders had been successful with their prior start-up.)

Reveal Imaging Technologies Inc. in Bedford has been on a tear, selling its compact explosives scanning systems to customers like the Israel Airports Authority, the Shanghai International Airport, and the Transportation Security Administration.

And Carbonite Inc., a Boston company that runs a subscription-based data back-up service for PCs, is another IPO prospect.

Brightcove Inc., a Cambridge company that has raised $99 million in funding from corporate backers and venture capitalists, has positioned itself as a major player in publishing video on the Web and managing advertising within videos. (The New York Times Co., which owns the Globe, is an investor in Brightcove.) Brightcove has 10 offices around the world, and expects to end the year with about 300 employees, said CEO Jeremy Allaire.

Several people familiar with the company estimate its annual revenue in the $40 million to $50 million range, which may be a bit low for a compelling stock offering. The company won’t comment on financials, although Allaire does acknowledge that Brightcove hasn’t yet achieved consistent profitability.

“I’m pretty open about what we’re trying to do,’’ Allaire said. “We’re trying to build a great, global, independent company.’’ As for an IPO, Allaire, who sold his last company to Adobe Systems Inc., said, “It’s definitely something I’d like to see happen.’’

But for most companies, said Dagres at Spark Capital, the IPO is a wish that won’t come true. “There are companies that want to be public and companies that should be public, and they’re not always the same thing,’’ he said.

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.