Business Week article Tech IPOs: Here Comes The Next Wave profiles a few potential IPO candidates for 2006, TellMe Networks being a notable one, which was founded in 1999 and has raised a huge $232 million in venture capital. TellMe turned profitable in 2004 after roughly doubling revenues in each of the prior two years, and posted about $100 million in sales in 2005.
There are a number of other companies in the $50 – $100M range that are waiting in the wings and figuring out their growth and exit strategies, and they span multiple domains.
Shutterfly is a consumer Internet photo site that is growing fast and well. I have written previously about Epocrates, Netsuite, Capella Education. Epocrates is a targeted Mobile Content service for Physicians that is growing on the basis of subscription and advertising revenues. Netsuite is a SaaS service for SMEs, while Capella is an Online University.
The Business Week article identifies some others. The networking equipment sector hasn’t produced a blockbuster deal since NetScreen Technologies Inc. went public in 2001. But companies such as Force10 Networks, Peribit Networks, and Calix have since developed into serious IPO contenders. Since September 11, venture firms have pumped lots of capital into security technologies. Those investments have produced promising IPO candidates, such as Fortinet, CipherTrust, and ArcSight. Sunnyvale (Calif.)-based Fortinet, would like to go public later this year at a valuation of $750 million to $900 million, or five to six times its projected 2006 revenues, says Chief Financial Officer Harold Covert.
Below, I summarize the market segments that have representative IPOs and show trends for future overall market attractiveness for the next 24-months:
Consumer Internet (Shutterfly, Nextag)
Small-Medium Enterprise Solutions (NetSuite, Epocrates)
Online Education (Capella)
Security and Networking equipment, on the other hand, although still have several IPO candidates, and some companies in those sectors are doing well, the outlook is somewhat less exciting than the above. One notable exception is Qualys, a Security SaaS (Managed Security Service provider), which will probably do $40-$50M in sales this year. This company and its business model have a lot of potential.
The Venture Market for Consumer Internet and SaaS are quite hot right now. SME and Online Education, on the other hand, have not yet caught hold amongst the VCs. However, given the MySpace generation’s level of comfort with the Internet, Online Education at ALL levels – kids, teens, college students, working adults – are exciting categories, each with their own nuances.
In earlier years, the only way to market educational products for children was through schools and parents. Now, however, sites like MySpace, Facebook, Piczo, Xanga, etc. offer direct access to the kids themselves. If, for example, eSylvan, the tutoring service, wanted to market to these kids, it has ample opportunity to create tremendous word-of-mouth via social networking amongst them. And since both Generation X and Generation Y are very much on the Internet as well, adult education online is just as attractive and viable.
SME’s last great victory was Intuit. Since then, VCs have shied away from this market which has trillions of dollars in spending power. Netsuite and Epocrates, perhaps, will unlock this market as well within the next 18-24 months.
Finally, the other emerging market that I see as a strong long term opportunity is Content. VCs typically don’t like Content, because it is a “hits” business. Epocrates, however, has turned the content model on its head. Something to note.