"There is nothing the company did to make the stock go from $13 to $21 that first day," says CEO Allen Razdow of MathSoft. "That is a function of how IPOs are viewed and used by the investment community."
Razdow learned that through bitter experience. Later that year, when MathSoft announced poor earnings, it was punished as excessively as it had been rewarded that first day. Razdow, however, is unfazed about events over which he has no control. "When you get past the first 30 days, there is a much more reasonable correlation between the performance of the stock and the performance of the company," says Razdow, who acknowledges that his company was burned by its mistakes but is sanguine about its long-term future: "In the end the investment community is pretty smart, and it knows how to evaluate companies on a rational basis."
Razdow's experience shows that there's a world of difference between the important number -- the price at which the company goes out -- and the uncontrollable number, the price at which it ends up after a day. Companies should be more concerned about the ease of going public than about the velocity a hot market gives to their share price. The important fact about last year's market is not how well the stocks performed after they were issued but how many companies simply had the opportunity to go public at all.
Some companies, in fact, say they seized the opportunity to go public not for the capital but for the validation. "We raised in the neighborhood of $40 million, and all of it is still in the bank," says Mitchell Kertzman, CEO of Powersoft. "The main reason we went public was to establish greater credibility and visibility with our corporate customers." Likewise with Gymboree, a chain of children's clothing stores that raised $20 million and still has it sitting in the bank. CEO Nancy Pedot says the company went public to liquidate its debt to the venture capitalists and because in the retail industry the visibility is priceless.
Will the market's appetite for IPOs continue unabated? "The fashions of the IPO market will continue to rotate as the IPO window continues to remain open," notes VentureOne's Gleba, adding, "There seems to be an appetite among investors for high-risk-concept or development-stage companies." Last year's winner was technology stocks, whereas in 1992 health care was the fall season's best-seller. Gleba predicts the next big thing will be multimedia companies or hybrid companies that link information technology with health care.
Whichever sector heats up, ultimately, reason must return to the market. Take Boston Chicken. Please. Says Harvard Business School professor William Sahlman: "I can't disprove that they will end up justifying the price." But at 48 bucks per share, he says, "that's when they begin losing sight of what the natural possibilities are for the market."
Sahlman argues that companies should not make the same mistake investors do: confuse price with value. If you add up the price of all the food and restaurant chains that went out last year and run basic multiples on the group, "you can work out mathematically that they can't collectively get there from here, because the Achilles' heel is good locations," Sahlman says, which are a limited resource.
So although Boston Chicken may be the one of 20 to succeed, "where I go short is a portfolio of them all," Sahlman says. "To assume that this whole sector will continue to live up to the implicit assumptions is just crazy," he continues, comparing the food-and-restaurant sector with disk-drive companies in the 1980s or bowling-lane makers in the 1960s and 1970s. "Five years from now," he predicts, "we're going to write about the fallout from the class of '91 to '94."
Try telling that to John Schnatter, the brash 31-year-old CEO of Papa John's International, a hypergrowth pizza-delivery company that went public at $13 a share in June and closed the year at $27.25 (and climbing). "We had a $100-million capitalization last year, and people said, 'That's ludicrous,' " he says, noting that since then the company has doubled in size. "Now we have a $250-million cap -- and they're saying the same thing." -- T. E.
HOW THE INC. 100 ARE SELECTED
The 1994 Inc. 100 is the 15th ranking of the 100 fastest-growing small public U.S. companies.
The companies on the list are ranked by the growth rate in their total revenues (or net sales) from fiscal year 1989 to fiscal year 1993.
To be eligible for the Inc. 100, companies must be publicly held, independent corporations; they may not be subsidiaries or divisions of other companies. They must have gone public no later than December 31, 1993, and there must be an active market in their stock.
Each company must have reported 1989 revenues of no less than $100,000 and no greater than $25 million. Companies with 1993 revenues that were lower than 1992 revenues were disqualified.
Utilities, oil- and gas-exploration companies, and capital-enhancement companies -- such as banks, insurance carriers, real estate developers, holding companies, and other investment offices -- are excluded from consideration.
Researchers reviewed the financial results of some 3,575 companies and interviewed the chief executive officers and chief financial officers of several hundred finalists. Inc. 500/100 research manager Stephanie Gruner directed the Inc. 100 research team, which included Marc Johnson, Albert Kim, Louise Leavitt, Joshua Macht, Elizabeth McCullough, Florian Padberg, Sarah Schafer, and Richard Selph.
