It's Comeback Time for Venture IPOs

Last year marked the second consecutive year of unusually low numbers of initial public offerings launched by companies owned by venture-capital firms. There were eight such IPOs in 2009, according to data from Dow Jones VentureSource. That amounts to just 15% of the 54 deals that priced, according to Dealogic. The proportion of venture IPOs could be skewed by the small number of deals last year as 2010 is being forecast as a much larger year for new issuance overall.

"Valuations have been getting better, and that's been making that [IPO] channel more attractive [to issuers] than it's been in a long time," says Scott Gehsmann, a global capital-markets partner at PricewaterhouseCoopers.

From the point of view of buyers, the rise of the broader stock market in 2009 meant that existing stocks are coming closer to their fair valuations—making IPOs, which normally are discounted to compensate for investor risk, more attractive. Although venture-backed companies tend to fall into the small- and sometimes mid-cap category of stocks, there is still a universe of buyers out there, including mutual funds, says Greg Ingram, co-head of equity capital markets at Robert W. Baird & Co..

"There are dedicated small-cap buyers that are at the largest institutions on the planet, and they need to buy small-cap names. Attractive small-cap IPOs will be of interest to them," Mr. Ingram says.

Mr. Ingram and others say they are mindful that a prolonged or severe market downturn could change the landscape for IPOs this year.

But even in good market environments, most venture-backed companies prefer to sell outright to a buyer than to go public, says Dan Nova, a general partner at venture-capital firm Highland Capital Partners.

"I think acquisition activity will be at least, if not more, active than the IPO market" for venture capital-backed firms, says Mr. Nova, who believes between 30 and 50 venture-backed IPOs could debut this year.

Right now, VentureSource counts 33 venture-backed companies on file for IPOs with the Securities and Exchange Commission, or half the total 67 deals in the U.S. backlog, according to Dealogic.