Here’s One Way to Track and Play the Mini-Boom in IPOs

Photograph by Jeffrey Coolidge

It's been a good quarter for Hercules Technology, which had four portfolio companies go public and another two get acquired.

The IPO mini-boom that’s sweeping Silicon Valley means big bucks for the venture capital firms that made early bets on billion-dollar companies. How much money each firm is making is guesswork, because as private partnerships, the only people who see the numbers are the partners themselves and investors in the funds.

Hercules Technology Growth Capital is an anomaly. As a publicly-traded venture firm, its success is on display everyday just like Apple and Google. And lately, the line is pointing up. As of last week, Hercules’ stock had climbed 17 percent this year, topping the 10 percent gain for the S&P 500 and beating the Nasdaq by 2 percentage points. The company is valued at close to $550 million.

What’s also unique about Hercules is that it’s one of a handful of firms that specialize in providing debt to startups instead of equity. Typically, the firm issues a loan that gets paid back over time with interest, and it gets warrants to buy a certain amount of stock at a given price. Hercules also pays an 8.3 percent dividend to its investors so they can make money even if the stock goes nowhere.

Manuel Henriquez, who co-founded the Palo Alto, California-based firm in 2003, attributes the recent success to a first quarter that saw four portfolio companies go public (Cempra,Annie’s, Merrimack Pharmaceuticals and Enphase Energy) and another two get acquired (BARRX Medical and NEXX Systems). For Hercules, that’s a record number of transactions for a single period.

Among companies still in its portfolio are Box, Trulia and Glam Media, which are all headed toward the public markets. And Facebook, of course. Hercules bought over 300,000 shares of the social-networking site at $31 a share. Should Facebook go public at a $100 billion valuation, Hercules would notch a 39 percent gain.

“People are beginning to realize that we’re sitting on more than 100 different warrant and equity positions in some really attractive companies,” Henriquez said.

Hercules plans to put $500 million to $700 million to work this year, though Henriquez does see risks both in the European debt crisis and the soaring private market valuations of social media companies.

Those are also concerns for investors in Hercules shares, for anything that disrupts the current upswing in IPOs hurts the potential value of high-flying startups.

BY ARI LEVY  | APRIL 23, 2012 10:10 AM EDT