Peering Up the E-Commerce IPO Pipeline

What was a torrent of offerings in 1998 and 1999 slowed to a trickle in 2000, and now has stopped completely. In recent months, only PayPal, which filed for an IPO in late September, has stepped forward to say it wants to test the market for initial public offerings. And it has yet to price its stock.

"I really can't think of anything in the e-commerce or dot-com area that'll grab investors' attention anytime soon," Morningstar.com stock analyst George Nichols told the E-Commerce Times.

Still, market watchers also say it is never too early to peer up the IPO pipeline and start to identify the firms most likely to take a run at going public when the economy turns around -- even if that turnaround is not for another year.

The first place to look, Nichols said, is the venture capital market.

"The areas that get the biggest influx of VC dollars today tend to crowd the IPO pipeline one to three years from now," he said.

Better to Give

One firm that keeps reappearing on venture funding lists is GiftCertificates.com. In late October, the Omaha, Nebraska company added US$4.4 million to a $21 million round it started in June. Before that, GiftCertificates took in $68 million in two previous rounds.

In between funding rounds, GiftCertificates merged with its two largest competitors, Giftpoint.com and Giftspot.com, giving the company a strong hold on the market.

"We don't have an immediate need or plans to go public, but we aren't ruling it out," GiftCertificates CEO Michael Ahern told the E-Commerce Times. "We think it's going to take some time for things to turn around and that will give us a chance to get a few more strong quarters under our belts and prove our business model."

That model, Ahern said, is built in part on the idea that it will work online or off. Because GiftCertificates.com gets merchants to discount certificates, there is a profit on every sale.

"Our business would exist without the dot-com on the end," he said.

On the Block

The online auction industry is another that has been cited as having potential to provide a future e-commerce IPO. After all, the sector is growing rapidly and EBay (Nasdaq: EBAY) has already demonstrated that it can be a profitable line of business.

"Auction purchases continue to shine," said Forrester Research analyst Carrie Johnson.

However, EBay's dominance of the auction market might make it difficult for one of its competitors to crack open the IPO door. BidBay has said it would try, filing for an offering earlier this year.

Make the Call

Although EBay has sued BidBay for trademark infringement, its biggest problem may be its lack of profit -- or even of revenue for that matter. In an October 19th filing with the U.S. Securities and Exchange Commission, BidBay said it has accumulated $7.5 million in debt but has only recently started to generate revenue.

BidBay's offering statement says it hopes to raise $60 million by selling 6 million shares at $10 each.

Meanwhile, EBay's largest competitor, Ubid.com, has already had a run as a public company. Ubid went public in 1998 -- making the third-biggest splash that year behind only Amazon.com and EBay -- only to be absorbed into the CMGI incubator network early in 2000.

No Such Luck

Some pure-play Internet sellers tried the IPO market in the past year, only to be turned back. Mercata.com, the group-buying site backed by Microsoft (Nasdaq: MSFT) co-founder Paul Allen, sat on deck for months, only to pull its IPO and fold up shop in the same week in January.

X10.com tried to give its IPO chances a boost with its online pop-up ad campaign that began appearing on browser screen after browser screen earlier this year. But the company also withdrew its offering in late September.

Ebb and Flow

One reason for the lack of IPOs of late is the sea change that altered what investors want to see in a startup before pouring in the dollars and getting it ready for Wall Street.

Where a good idea was once enough, investors now want profits -- or a clear, verifiable path to them. With real profits on paper nearly a requirement for making a strong IPO, many growing dot-coms are out in the cold.

Nichols said he singled out PayPal back in June as a potential candidate to break through the clogged pipeline. PayPal's strongest asset is its viral marketing model, which requires anyone who wants to send or receive payment from PayPal to sign up as a member. That has allowed PayPal to grow sales at a 39 percent per quarter while spending only 8 percent of revenue on marketing.

"These bright spots are enough to suggest that they may be able to debut in this inhospitable market," Nichols said. "However, they may have to do so at fire-sale prices because they're still not profitable. I don't expect investors to jump all over its offering."

You'll Never IPO Alone

For now, e-commerce can take comfort in knowing it isn't alone. No companies went public from any market sector for nearly six weeks starting in mid-August. Those that are making the jump now are mainly in the health care or defense fields.

In fact, the current Wall Street climate is "the worst IPO market in the past two decades," according to Nichols.

Is it really all that bad? Nichols and other analysts say yes -- at least for now.

"There will be a next wave of e-commerce IPOs, but it's not cresting just yet and it won't look like the last one," Richard Warner, associate professor of e-business at Chicago-Kent School of Law, told the E-Commerce Times. "Companies are going to have to prove their business models to some very skeptical investors and underwriters."