Companies eager for IPOs feel thwarted by slow market

— -- Entrepreneurs need a good idea. They need guts. And ultimately, many of them want an IPO so they can take their new business to the next level.

But the virtual lockdown in the initial public offering market has snatched that golden ring right out of entrepreneurs' hands, leaving a group of frustrated executives at a loss as to how to raise capital and help their businesses grow. They say it's snuffing out innovation, new ideas and job creation at a time when the country needs it most.

Meanwhile, it's also preventing the venture capitalists who provided seed money to these businesses from cashing out and betting the money on other new firms that need to get off the ground.

For entrepreneurs, the shutdown in IPOs "has caused a very difficult situation for anyone in a fledgling new business," says Brian Appel, CEO and founder of Changing World Technologies, an alternative energy company that pulled its IPO plans on Feb. 17. "The debt and equity markets are closed to new ideas."

The IPO market has been essentially halted for more than a year. Just two companies have sold stock to the public this year so far, down from 21 during the same time period last year, says Renaissance Capital.

And 2008 was one of the worst IPO markets in recent history, with just 43 companies going public, down from 272 in 2007, 219 in 2006, 214 in 2005 and 217 in 2004.

While entrepreneurs are often hardwired to be optimistic, the reality of not being able to raise money from the stock market is causing them to adjust, tweak or forge ahead on their long-term plans. How some entrepreneurial companies are reacting to a world with few IPOs:

Changing World Technologies.

The company, developing ways to turn fat, grease, feathers and other waste into fuel, is one of 20 companies that have postponed or withdrawn their IPOs in 2009, Renaissance Capital says.

The company hoped to raise roughly $28 million to further its research into products to help the U.S. reduce its demand for imported oil.

What doomed Changing World's IPO? CEO Appel blames Wall Street firms, which rushed to sell shares of other alternative energy companies to the public before they were ready. Investment banks, he says, were able to sell companies with poor fundamentals after former president George W. Bush stoked interest toward the end of his term.

Many of these stocks have been debacles for investors and have soured opinion on the entire sector, Appel says.

For instance, one top player, Pacific Ethanol, went public to much hoopla in March 2005. The stock surged from $10 to more than $40 in May 2006, only to crash to 39 cents on fears the company might run out of cash.

Investors burned by such alternative energy "hype" are now unwilling to fund the sector, Appel says.

As a result, Changing World is "in hibernation" until it can find a private investor willing to "come in and buy at a distressed value," he says.

And that will put many of the technologies needed to move the U.S. away from imported oil on hold, he says. "Now, good companies with good ideas get hammered."

TherOx.

Not being able to tap the public market is toxic for capital-hungry medical companies, says Kevin Larkin, CEO of TherOx, which develops devices to treat oxygen-deprived human tissue.

Early-stage medical companies count on private investors to get research underway. But when it comes time to turn ideas into products, the deep pockets of the public markets are needed, Larkin says. TherOx pulled its IPO in February.

Medical companies choked off from IPOs will have difficulty finding private investors with the resources to fund their ideas. That means potential medical breakthroughs will die as good, but unfunded ideas. "In the absence of enough money to support young ideas, there will be fewer innovations," he says.

Luckily for TherOx, the company raised $25 million in January 2008 back when it didn't think it would need the cash. It is using that money now to stay alive, but cannot afford to do much more. Larkin hopes the IPO market revives so the company can raise money if it gets regulatory approval for products this year. "We have the will," he says.

GlassHouse Technologies.

This information technology firm pulled its IPO in March. That put the company's plans to expand by buying other technology firms on hold, says CEO and co-founder Mark Shirman.

Plus, the company is being more careful with its cash, and eliminated some jobs last year as part of digesting several companies it bought in 2007.

But largely, the company is hopeful despite a weak economy. Much of the consulting it does allows companies to use technology to cut costs, and that's an easy sell these days, he says. The company burned through nearly $9 million in cash during 2007, the most recent financial information it provided as part of filing for an IPO.

Now, though, the company is generating cash, Shirman says, and can afford to be patient until it may try to go public again.

Vitamin Shoppe.

The seller of vitamins and other nutritional supplements is forging ahead with growth plans, despite canceling its IPO in February, says spokeswoman Susan McLaughlin.

So many other retailers have failed, Vitamin Shoppe is benefiting by getting attractive lease terms on store space. The company plans to open more than 30 locations this year. Pulling the IPO "is not stopping us from doing anything needed to make the business grow," she says.

Meanwhile, some hope that growing companies able to hang on may soon find the IPO market opening up. The year's two IPOs, Chinese online game maker Changyou.com and baby formula maker Mead Johnson, have jumped 56.3% and 10.8% from their IPO prices.

And for the first time in weeks, there are companies on the IPO calendar. Online school Bridgepoint Education and language education software maker Rosetta Stone are expected to go public this week.

"There may be a lot of doom and gloom," says Linda Killian, portfolio manager at Renaissance Capital. "But there is definitely a wellspring that at some point will open up."