Some hope Vonage IPO is tonic for tech recovery

February 15, 2006|By JAY HANCOCK

The stock sale by Internet phone company Vonage Holdings won't represent the biggest-ever offering by a technology company, the greatest win (yet) for Baltimore's New Enterprise Associates or the tonic that single-handedly cures the technology slump.

But it will be one of the most important initial public offerings of technology shares for 2006, and some in the industry hope it will set the stage for a long-awaited, sustainable tech recovery.

"This is a significant technology IPO. And if they do well post-IPO, for the next couple of months here, that may kind of break a logjam that has developed for venture IPOs in general," said Mark Heesen, president of the National Venture Capital Association.

"Maybe, maybe this is a signal that the investing public is open to technology-based IPOs again," Heesen said.

Based in Holmdel, N.J., Vonage uses the Internet to transmit voice communication for as low as $14.99 a month.

Vonage is the vendor for you if you want landline phone service but hate traditional phone companies as well as cable outfits, which are also beginning to offer Internet phone calls.

Vonage signaled its long-awaited offering last week by filing an initial prospectus with the Securities and Exchange Commission. It's the first public look inside the company's financial results and ownership structure.

Among other things, the document shows that New Enterprise, founded in Baltimore in 1978 and one of the best-known and biggest investors in technology and medical startups, owns a fat 22 percent of Vonage. (New Enterprise also has offices in Menlo Park, Calif., and Reston, Va.)

The deal hasn't been priced yet. But at an initial offering price of $10, New Enterprise's 79 million shares would be worth $790 million, which is certainly a huge return on whatever the firm and its partners invested. (Investors' cost basis isn't disclosed.)

A successful Vonage stock sale and continued favorable performance would present the best evidence yet that New Enterprise has emerged from the 2000-2003 technology crash in fine form.

Venture-capital facts are hard to come by, but New Enterprise probably made more than $1.5 billion on Juniper Networks, a router company it backed in the 1990s. Its Vonage investment has the potential to hit that level, assuming it doesn't sell a bunch of stock in the initial offering; there is no indication that it will.

Most companies and investors in registration to sell public stock decline to comment on the offering outside carefully orchestrated pitches to institutional investors. A New Enterprise spokeswoman didn't return my call.

Most of New Enterprise's Vonage shares are held by the NEA 10 partnership, which raised $2.3 billion and closed to new investors in 2000.

NEA 10 had an internal rate of return (which varies from what's due the limited partners) of 3.2 percent for the year ending June 30, according to the California Public Employees' Retirement System, which is a limited partner. Reaping Vonage returns could boost that figure significantly in coming years.

There is no guarantee that will happen, however.

Vonage is growing quickly but losing lots of money, the filings show. Revenue boomed from $80 million in 2004 to $174 million for the first nine months of 2005, but because of big advertising costs losses ballooned by a similar portion, from $70 million in 2004 to $190 million for the first three quarters of 2005.

And there is no guarantee that Vonage will ignite the technology stock-offering market, either.

"I think the stock market in general is hungry for good technology deals - good being defined as fast growth and profitable and a near potential to be profitable," says Frank A. Adams, founder and managing general partner of Grotech Capital Group, another Baltimore venture firm. But many venture-backed startups don't yet fit that category, and "I don't believe that Vonage will cause a firestorm of companies to come forth that were not already in process" of offering stock, he said.

The spectacular Google offering of 2004 was expected by many to boost technology IPOs, but the opposite happened. While 2004 showed a wimpy recovery of venture-backed offerings in the wake of the tech collapse - 93 deals versus 29 in 2003 - the number of initial offerings sank again in 2005, to 56, according to the National Venture Capital Association.

(The $158 million raised last year by Under Armour, Baltimore's sports apparel darling, was No. 23 among 250 venture-backed initial offerings since 2001.)

The reversal was partly caused by investors' love affair last year with petroleum and real estate instead of technology. Partly, it was the fact that some startups sold themselves to big companies rather than issue stock. And partly, it was the fact that investors demanded more maturity and better financial results before taking a flier on initial offerings.

The median age of venture-backed companies issuing public stock for the first time has risen past 6 years after sinking to nearly 4 years in 1998, according to the association.

Vonage will be 6 in May. Its potential appearance in the Nasdaq listings may point toward a new wave of technology offerings. Or, in the more likely scenario, it may mark a milestone for a single company and a big win for New Enterprise, but not a new boom.

jay.hancock@baltsun.com

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