initial public offerings (IPOs) trading on American exchanges

Wednesday, May 20, 2009

SolarWinds' IPO Raises Hope

The successful IPO of SolarWinds, a maker of software for monitoring and repairing computer networks, offers hope to other venture-backed startups

SolarWinds (SWI) sells neither solar nor wind technology, but it landed in the spotlight and caught a puff of air when it went public on the New York Stock Exchange on May 20. The maker of software for monitoring and repairing computer networks went out at $12.50 per share, quickly rose above $14, and later closed at $13.75 in spite of declines in the broader market.

It was only the second technology company to go public this year and offered hope to other venture-backed startups hoping to sell shares publicly. "It's exciting to be a company that maybe helps break the logjam and creates excitement in new issues coming back," Chief Executive Mike Bennett said in an interview. Rosetta Stone (RST), a maker of computer disk-based language instruction products, went public on Apr. 16. After climbing initially, it is now trading just below its initial public offering price of $25. Another tech company, OpenTable, which provides online reservations for restaurants, is expected to go public on May 21. "This is great. I just hope it unleashes a more substantial flow rather than a trickle," says Tasso Roumeliotis, CEO of startup WaveMarket, a mobile-phone software company that hopes to go public in the next couple of years.

If this is a turning point, it could help revitalize a stagnant venture capital industry. There were only six venture-backed IPOs last year, a drop from 86 in 2007 and 56 in 2006, according to the National Venture Capital Assn. In the face of a brutal economic environment, venture capital firms have been pressuring their portfolio companies to cut costs and have been investing less in startups. VCs invested just $3 billion in 549 deals in the first quarter of this year, a 47% decline from a year earlier.

Yet SolarWind may be better poised than other companies to withstand the harsh market conditions. The 10-year-old company makes software tools for use by network engineers and administrators. Its products can be installed quickly, and the lower-end products cost just $2,000. That helps explain why the company remains profitable in spite of the recession. SolarWind logged net income of $22 million on revenue of $93 million last year. In the first quarter, the company's sales rose a healthy 18%, to $24 million. "The IT world is focused on efficiency and optimization these days, and SolarWinds plays into that story. What they do is help out with cost avoidance," says analyst Abner Germanow of market researcher IDC.

The company was started in Tulsa, Okla., and co-founders Donald Yonce and David Yonce chose SolarWinds as the name because of their affection for outer space lore. A solar wind is material ejected at a very high velocity from the Sun. After investment firms Bain Capital Ventures and Insight Venture Partners bought controlling interest in the company three years ago, it was moved to Austin, Tex., for greater access to talent. That's also when veteran executive Bennett was brought in to run it.

Bennett said he expected the IPO would raise approximately $150 million for the company and investors. "The current economic conditions don't scare me," he says. "We have lived through the worst part, we hope, and have a solid sense of the impact on our potential customers." Sales volumes dipped late last year and early this year, but have picked up recently, he said.

SolarWinds has a low-cost business model. It has no field salesforce but instead sells products directly to networking professionals via its corporate Web site. It also has an online community,, where techies help each other solve networking problems and provide SolarWinds with feedback. So far, the company has more than 80,000 customers, ranging from small businesses to giant corporations.

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