Flush with VC cash, young companies in no rush to hit IPO trail

Just as Wall Street imploded three years ago, Scott Dorsey needed cash to grow his company into a big business.

But after the stock market fell, the Indianapolis entrepreneur canceled plans to sell $86 million in stock on the open market. Instead of going public, ExactTarget stayed private.

What happened next shows how a new economy slowly is taking shape on 2008’s ruins, financed partly by nearly $400 million flowing in from out-of-state investors.

Indiana banks pared loans in the recession. Public stock offerings stalled in a U.S. economy marred by slow job growth. Yet, Dorsey raised $175 million from investors, including a $30 million infusion last month.

Using the cash, ExactTarget in two years has bought three companies, opened sites in Australia and the United Kingdom and doubled its head count. The company, which helps clients connect with their customers through email, now employs 1,000, including about 600 people in Indianapolis.

Going public means selling ownership in the company. Stockholders expect higher profits each three-month quarter. By staying private, and drawing cash from Boston-area tech investor Battery Ventures, ExactTarget plowed quarterly profits into future growth.

“It’s pretty safe to say we wouldn’t have had the kind of organic growth we’ve had in the last year or two if we’d gone public,” Dorsey said.

And it’s not just ExactTarget that is benefiting from investors.

Venture firms put $69 million into Indiana companies in the first quarter, one of the state’s five best periods, according to investment tracker PriceWaterhouse Coopers.

Eight firms — based in Indianapolis or Carmel — landed all the cash in the last quarter, including consumer adviser Angie’s List, search engine ChaCha, automotive financier Dealer Services, and sleep products researcher Dormir, according to PriceWaterhouseCoopers.

“We brought in a round of financing just to build the business,” said William Oesterle, chief executive officer of 550-employee Angie’s List, which secured $53.6 million from ExactTarget’s financier Battery Ventures.

The $69 million to Indiana companies is only a cash trickle compared to California’s Silicon Valley, which hauled in $2.4 billion in first-quarter venture capital. But in the industrial Midwest, Indiana stands out.

In the first quarter, more venture capital flowed into the state than Michigan, Ohio and Wisconsin combined.

“I wouldn’t draw any conclusions from one quarter,” said Indianapolis lawyer Chuck Schalliol, a director of four local investment funds. “But I do think Indiana is increasingly a destination for venture capital looking to invest in both the health-care and technology space.”

On the ladder of finance, entrepreneurs start with seed money, usually loans and their own savings. Once sales volume grows, some can expand and develop products or services by securing venture capital. To pay back the capital, entrepreneurs often rely on private equity investors, who provide money in return for a share of ownership.

When a company stages an initial public offering — an IPO in which a company sells shares of ownership on the public stock market — often it is raising money not only to finance growth but also repay the private equity investors.

With the U.S. economy recovering, IPOs raised more than $1.4 billon in the first quarter.

And just last week, the digital career networking site LinkedIn went public at about $45 per share, and soon shot up to $94.

But there isn’t a huge clamor to go public. In spite of LinkedIn’s coup, Angie’s List’s CEO said he’s comfortable with private financing right now.

“We had very good success in finding private equity investors,” Oesterle said.

Angie’s List in 2005 secured an investment by BV Capital, a San Francisco firm that grew out of Bertelsmann Ventures, a 1990s Internet financier. BV invests in digital companies, including Groupon, the online shopping coupon distributor. BV introduced Oesterle to Battery Ventures.

Battery Ventures put cash in Angie’s List, bringing the value of its investments in three Indianapolis companies to nearly $150 million. In addition to ExactTarget, Battery Ventures invested in Consona, the tech firm formerly known as Made2Manage.

“It’s almost an extraordinary concentration to have that much invested here by one firm,” Oesterle said. “They’re top-notch, one of the finest venture funds in the world.”

In the 1990s, Battery Ventures sought IPOs for fully 40 percent of the companies it invested in. These days, going public is tough for an array of reasons, including the demise of midsize Wall Street firms that underwrote stock issues. Only about 20 percent of Battery Venture’s investments currently go public, said Dave Tabors, a general partner in the Boston investor.

“A lot of companies that would have been interested in going public are now interested in doing a transaction with us where we’re buying into the company,” Tabors said.

Battery Ventures now invests knowing a likely outcome is a sale of the business, or recapitalizing it with the sale of bonds to other investors.

At ExactTarget, Dorsey doesn’t mind the shift in outlook away from IPOs.

“We’ll continue to speak to the investment bankers (about going public), but it’s not something we feel we have to do,” Dorsey said. “We’ve had no trouble raising money privately.”