Initial Public Offering (IPO) - More E-commerce Companies Go Public, 1997-1999, Ipo Slowdown Began In 2000

An initial public offering (IPO) takes place when a privately held company goes public and makes its first offering of shares to the public. It is a significant stage in the growth of a business. It provides the business with access to capital, not only through the IPO, but also through subsequent secondary stock offerings. For the company's founders and venture capital backers, an IPO can provide the opportunity to realize a substantial cash return on their early investments. IPOs also tend to generate a lot of publicity and create more interest in a company. Once a company has gone public, it can use its stock in acquisitions and mergers. Stock can also be offered to key employees and used to attract new talent.

Investors were attracted to the IPOs of high-tech and e-commerce companies in the last half of the 1990s. Many of those companies had yet to turn a profit, yet their IPOs were successful beyond all expectations. Investors appeared more interested in a firm's potential for success in the online world, as indicated by its market position or market share, and seemed willing to overlook its losses. This displacement of profitability by market potential in the eyes of investors was one phenomenon that led observers to develop the concept of the New Economy.

Although America Online went public in 1992, it was the hugely successful IPO of Netscape Communications in August 1995 that was credited with starting the investor craze for Internet start-ups that lasted until the end of the decade. Netscape's stock was first offered at $28 a share; it was worth $75 after one day of trading, and it peaked at $171 on December 5, 1995. The company's first-day market capitalization was $2.2 billion.

In 1996 it was the IPOs of Internet search engines that attracted the interest of investors. Yahoo!, Lycos, and Excite all went public in April 1996. Yahoo! sold 2.6 million shares at $13 per share on the NASDAQ. By the end of the first week shares more than doubled to nearly $33. Following its IPO Yahoo! had a market capitalization of more than $1 billion. Lycos raised $40 million with its IPO. Following their successful IPOs, other Internet companies announced plans to go public.

From mid-1996 through mid-1997 investors began to view electronic commerce companies more realistically, and relatively few high-tech or e-commerce IPOs were executed. Weak first quarter earnings in 1997 from established firms made investors more selective about buying new technology stocks.