Window of Opportunity

The IPO window is open or at least ajar – for storage networking companies. But it's not clear how wide the opening will get, or how many companies will clear the sill before it shuts again.

There is certainly a sense of market optimism, fueled by recent high funding rounds for revenue-generating private companies (see It's Raining VC Money) and an uptick in overall IPO filings.

Case in point: LSI Logic Storage Systems Inc., a wholly owned subsidiary of LSI Logic Corp. (NYSE: LSI) that filed for an IPO and hopes to complete it by the end of June -- if the market doesn't take a turn for the worse or problems develop inside the company (see LSI's Storage Sub Plans IPO).

Will others follow suit? Can they?

"The smell is good," says Giora Yaron, CEO of distributed file systems startup Exanet Inc. "Companies that survive this nuclear winter will be in good shape."Yaron took printer supplies startup Indigo NV to IPO in the mid 1990s, when IPOs were as common as email spam. He hopes to do the same with Exanet, though he admits it's years away. Others are considerably closer: Blade server vendor Egenera Inc. has voiced intentions to go public this year; backup and recovery software vendor CommVault Systems Inc. is also expected to try; and KVS Inc. and CreekPath Systems Inc. might have IPOs on the horizon.

These aren't the mid 90s, however, and the line for going public is a lot shorter and more selective than it used to be. In the bad old days of the bubble, companies could go public on a promise. A lot more is required to make the cut now.

First off is revenue. According SEC filings, LSI Logic Storage Systems generated $426 million in revenue in 2003, which would represent a profit of $15.7 million, or $0.31 per share.

Customers -- the right ones -- are also a key element, and seem to go with big funding. Egenera is making a splash with its blade servers and virtualization software. And while it won't make its numbers public, it boasts a roster of big enterprise customers and recently grabbed $30 million in funding. New CEO Robert Dutkowsky says the goal is an IPO this year, though he won't rule out other possibilities, such as a merger or acquisition (see Egenera CEO Sticks Up for Startups and Egenera Generates $30 Million).

"The board brought me in to take the company to the next level," Dutkowsky said in an interview with Byte and Switch this week. "Opportunity will help us decide what the next level is."According to figures on Hoover's Online, CommVault is closing in on profitability with $44.1 million in sales in 2003 – representing 48.1 percent growth and a loss of $100,000. Marketing VP Larry Cormier doesn't dispute the numbers. "We’re growing at double-digit rates because we’re focusing on a growing area," he says. Like Dutkowsky, Cormier is modest when it comes to the IPO prospect, though word on the street is that the company is close to filing. "We’re always assessing our business plan. We’re open to any option to further our growth."

After LSI Logic Storage, Egenera, and CommVault, the list of realistic IPO candidates gets real short, and the time frame gets farther out – at least late 2004 or early 2005. "I don’t see anybody else going public anytime soon," says analyst Kaushik Roy of Susquehanna Financial Group.

Roy says KVS and CreekPath bear watching, though. KVS, founded by a team of software engineers from Compaq in 1999, is a recognized market leader in email archiving, a market which has seen a great deal of M&A activity over the last six months. KVS said it was close to breakeven when it secured $17 million in funding last September (see KVS Collars $17M Round).

Judging by its bloodlines, storage resource management software vendor CreekPath might be more inclined to be acquired. The company is run by CEO Dennis Grant, who founded HighGround Systems in 1995 and sold it to Sun in 2001 for $400 million. The management team also includes other HighGround veterans (see Sun Loses Another HighGrounder}.

Like CommVault, KVS and CreekPath have made traction in the right markets. "All the problems that exist in storage today are management- and software-related," says Jeff Hinck, a Crescendo Ventures partner. "Those are the companies you have to look at."Sources agree that the economic atmosphere is favoring IPOs once more. But things can change quickly, and the reckoning is tougher these days. Revenues and customers aren't enough; startups seeking an IPO need the right market, and they need to be profitable. Even then, nothing's guaranteed.

"No question, there's renewed energy and enthusiasm," says Jay Hare, technology partner at PricewaterhouseCoopers. "But will that window open up to extend beyond companies that have profit? I personally haven't seen the window start to open for companies without profit... The window can change in a hurry, inside of a quarter. Stay tuned."

— Dave Raffo, Senior Editor, Byte and Switch