Finding the upside in a down market

It is ironic that the swelling ranks of unemployed people seeking to retrain may have opened the window for Grand Canyon’s IPO on NASDAQ.

Meanwhile, in the private equity market, some companies in promising sectors, or with potentially market-leading products, are getting venture funding. RollSteam Inc., for example, pulled in $6 million in Series B funding led by Core Capital Partners. Core’s managing director Will Dunbar said the company is an early leader in the growing enterprise collaboration market.

The market isn’t seeing such activity as a signal of a turnaround in venture deals or IPOs anytime soon. But companies with the right products or services at the right time may find some green in the otherwise grey economy.

Another example is, Tangion Inc., an organ and tissue regeneration company, that raised $21 million in a second closing of its Series C funding from financiers including Bain Capital, Johnson & Johnson Development Corp., and Safeguard Scientifics Inc., a holding company that builds value in growth-stage technology and life sciences companies. Gary Kurtzman, managing director of Safeguard's Life Sciences Group, said regenerative medicine is, “A space anticipated to become the source of significant innovation and medical products over the next decade.”

Watching the IPO

Not surprisingly, Grand Canyon’s IPO is being watched carefully by the financial market and IPO-ready companies to see how the price holds up. The company’s 10.5 million shares were listed at $12 per share, down significantly from the original $18-$20 planned when the IPO was in May. The shares ended the first day of trading just below $12.

The previous IPO from venture-backed technology firm Rackspace Hosting went out on August 8 at a price of $12.50 a share, and has been trading on the NYSE recently at nearly half that amount.

Eighty two IPOs have been withdrawn in the US so far in 2008, and only 31 companies have succeeded in listing this year, according to Thomson Reuters Data. Of these, only three were technology companies, which raised a combined total of $531 million. That compares with 37 tech IPOs in 2007 that raised a total of $7.6 billion.

IPO drought pressures VCs

As in the US, the IPO drought in Europe is putting pressure on its venture capital community. Europe’s VC industry saw deal activity and investment slow in the third quarter of 2008, with 209 deals completed – the second-lowest quarterly total on record – and Euro 1.18 billion invested, a 5 per cent drop from the Euro 1.24 billion invested in 245 deals during the same period last year, according to Dow Jones VentureSource.

Notably, European information technology companies accounted for just 85 deals and Euro 387 million in investment, 23 per cent less than the Euro 500 million invested in 114 IT deals during the third quarter of 2007. That’s the lowest quarterly deal and investment totals for the industry since 1999.

“Much like in the US, Europe’s IPO market is virtually nonexistent and the turmoil in the broader economy is keeping many corporations from acquiring venture-backed companies,” Jessica Canning, director of global research for Dow Jones VentureSource, said when the figures were released. “This is putting pressure on venture capitalists, who are being very selective in the number of deals they’re doing and kinds of companies they’re backing.” She added that the European IT industry trend is being mirrored closely in the US, where IT deal activity also reached its lowest point in more than a decade during the third quarter.

Drug, energy, Internet companies get the nod

GPC-Rx Corp., a drug development company just spun out of the California Institute of Technology, is one company that gained from its more capital-efficient approach in the hot area of drugs that target G-protein coupled receptors, or GPCRs. GPC-Rx got an unspecified amount of Series A financing from Accelerator Corp., a privately-held biotech investment and development company that typically invests up to $5 million in fledgling firms, plus other investors including Amgen Ventures and OVP Venture Partners.

“GPCRs are arguably the most important targets in all of current pharmaceutical research,” said Chad Waite, managing director of OVP Ventures. “This technology has the potential to ultimately lead to remedies for a host of medical conditions, from allergies to immune system complications.”

Trusted email company Goodmail Systems raised $20 million in a round led by Bessemer Venture Partners. The company’s CertifiedEmail can identify authentic messages from email senders with whom users have a pre-existing relationship. “At nearly a billion weekly transactions, we didn’t have to be geniuses to figure out that CertifiedEmail, secured by sender audit procedures and public key cryptography, is emerging as the industry standard for restoring trust to email,” said David Cowan, managing partner at Bessemer.

Other companies getting venture financing include Palo Alto Networks, a security and network infrastructure company that received $10 million to extend its third round of venture funding. Energy company Sun Ethanol Inc., now called Qteros, raised $25 million in a Series B financing. ISE Corp., a maker of advanced hybrid-electric drive systems and components for heavy-duty vehicles, recently got $17.5 million in a Series D preferred stock financing from Siemens Venture Capital and others.

Desperate times, creative measures

The incoming Obama administration has cited innovation, and particularly startups and small enterprises, as a key to jump-starting the American economy. The message is filtering through the market in various ways.

Some large companies are jumping in to help startups. Microsoft, for example, recently started BizSpark, a global programme that gives entrepreneurs and early-stage startups access to Microsoft development tools and production licenses of server products with no upfront costs and minimum requirements.

Microsoft’s European Chairman Jan Muehlfelt introduced the programme as a first step for helping European small and medium enterprises through the financial crisis and implementing many of the recommendations of the Small Business Act. “BizSpark follows the intent of the [European] Commission’s thinking on these two fronts, and will make life easier for SMEs, helping Europe’s business environment.”

And in an unusual partnership, institutional and venture investors are cooperating to address the IPO drought. T. Rowe Price, Silicon Valley Bank, Venrock Associates and others are financially backing InsideVenture, a membership company started in November. InsideVenture is a direct private market for qualified institutional buyers seeking investments in late-stage venture backed companies. It gives them restricted access to proprietary data, exclusive road shows and invitation-only conferences for late-stage investments and pre-IPO candidate review.

“Stagnation in the IPO market has left institutional fund managers with little opportunity to invest in the next generation of innovative growth companies,” said Mona DeFrawi, CEO of InsideVenture.

 “We believe InsideVenture’s initiative is important because the IPO markets are currently broken and need an alternative mechanism to connect the correct buyers and companies,” said Hugh Evans, vice president of T. Rowe Price.

Looking for bargains

Small companies also are being encouraged to belt-tighten by looking for bargains on building leases and out-of-work skilled labour, as well as renegotiating existing contracts. Venture capitalists have been doling out advice at meetings such as the recent Web 2.0 Summit and the Dow Jones VentureWire Technology Showcase that companies should preserve cash rather than focus on growth, and get 18 months’ worth of cash. Similarly, potential spinouts are staying within the fold of universities until conditions are more favorable.