Like the first signs of new growth after a wrenching drought, a crop of companies that went public last quarter prove it is possible to make it off the ground – and sometimes thrive – in markets recovering from several of the toughest economic years in recent memory. But unlike days past, only companies that show a solid business plan are making it out of the IPO gate.

The proof is in the numbers: Twenty IPOs (seven were tech or biotech companies) raised $3.1 billion in the third quarter in U.S. public markets, compared to only $540 million raised in the same quarter a year ago. The average quarterly return for the seven was 34 percent, more than three times the increase of the Nasdaq during the same period. “It was a phenomenal quarter,” says Jeff Hirschkorn, a senior analyst at IPO Monitor.

It is a great leap forward for an IPO market that was all but dead for the past few quarters. In the third quarter of 2002 and the first quarter of 2003, for instance, not a single tech or biotech company went public.

Companies that are leading the rebound share four traits: a strong balance sheet, maturity, profitability, and business models that work. While the number of deals might be down (just nine tech and biotech IPOs in the first three quarters of 2003, compared to 18 in the same period for 2002), the quality of the companies going public has improved.

InterVideo, founded in 1998, might prove to be a poster child for the new IPO. For the 12 months prior to its July public offering, the company earned $9 million in profits on $49 million in revenues. Net income rose 90 percent in the latest quarter, compared with the same quarter last year. The company has a sound business model, selling more than 50 million copies of its DVD player, WinDVD, to big companies like Dell and Hewlett-Packard. InterVideo took two years to get out the IPO gate, pulling its offering twice; once after the terrorist attacks of September 11, 2001, and a second time in response to the shaky market surrounding the U.S. invasion of Iraq earlier this year. “It was frustrating, but it was not as though anyone else was going public at that time,” says InterVideo chief financial officer Randy Bambrough.

Finally, the company raised $39 million in July by selling 2.8 million shares at $14 each. “The timing turned out pretty darn well,” says Mr. Bambrough. Shares today are trading at $17, up 21.4 percent from the offering price.

While InterVideo has been around just five years, the average company that went public over the past two years is at least a decade old, lending a new maturity to the market. FormFactor, which makes cards for testing semiconductors, went public in June and is 10 years old. The company is profitable, reporting $10.2 million in net income on a healthy $80.1 million in sales in the 12 months before its offering. It raised $84 million through its June 12 IPO, pricing each share at $14. Today, shares are trading at $24.93, up 78.1 percent from the offering price.

Profitability, it seems, is the new rule. “Take Amazon.com,” IPO Monitor’s Mr. Hirschkorn says. “In today’s market, nobody would have put money on them.” (Amazon raised $54 million in a 1997 IPO, but did not post a quarterly profit until the fourth quarter of 2001.)

Not surprisingly, just 10 to 15 percent of companies that went public during the dot-com boom were profitable, estimates Jesse Reyes, a vice president at Thomson Venture Economics. Contrast that with the first three quarters of 2003: More than three quarters of the nine tech and biotech companies that went public posted profits in the 12 months before their IPOs, compared to 4 of the 18 companies during the same period in 2002. “The bar has been raised,” says Patrick Lo, CEO of NetGear. After pulling its IPO in 2001, the company went public July 31, raising $98 million. “Last time around, the expectation was purely on top-line growth. Profit was not even a consideration.”

The new discipline, along with a more optimistic market, is paying off. The average closing price of shares on the first day of trading has jumped. More than half of the companies that went public during the first three quarters of 2003 closed with share prices up at least 20 percent. Only 6 percent of IPO companies saw a 20 percent share price jump during the same period in 2002. For example, Digital Theater Systems (DTS) went public the week before InterVideo, offered shares priced at $17 each. Its stock value surged to $24.92 at first day’s close. Today, DTS is trading at $33 and the company is valued at over $400 million.

Some IPOs are still doing what they did so well a few years back: making people rich. Igor Khandros, CEO and founder of FormFactor, holds shares valued at about $144 million. Ken Denman, CEO of virtual network operator iPass, which went public July 24, owns shares worth $49 million.

Joe Costello, CEO of Think3, a privately held manufacturing software maker founded in 1979, is watching the IPO market closely. He has met with top bankers at JP Morgan, SG Cowen, W.R. Hambrecht, and Goldman Sachs, but says he will not even think about taking Think3 public until it is profitable for several quarters – and strong enough to weather a more brutal market.

“People are feeling like the window is opening up again,” Mr. Costello says. “But it is a very different window. Investors are much more selective now. They are looking for the gem of the group, not for an area that is hot.”

Corporate portal builder Plumtree Software’s recent history proves what little patience investors have for unprofitable companies. Plumtree went public in June 2002. It raised $42.5 million after slashing its original $13 to $15 offering price to between $7 and $9. Plumtree lost $373,000 on $18.5 million in sales in its most recent quarter. Its shares are trading at an anemic $5.40.

Yet the market is showing some flexibility for companies with strong revenue growth. RedEnvelope lost $7.7 million in fiscal 2003 on $70.1 million in sales, but is expected to turn a profit by year’s end. Its offering, priced at $14 per share, was led by W.R. Hambrecht, which used its Dutch auction process called OpenIPO that lets investors place bids for the stock before it is priced. It went public September 25, raising almost $31 million. RedEnvelope is now trading at $13.35, down 4.6 percent from its IPO price.

One area that remains cool, for now, is biotech. The first biotech IPO of the year was Acusphere, which went public October 8 at $14 per share and hardly budged on the first day, closing at $14.03. Nonetheless, the company raised $52.5 million. That is money it will need to offset a high cash burn rate typical of biotech companies. It also paved the way for more offerings. “Investors are thinking: ‘We got that clunker out. It did not tank completely. The next one will be huge!’” says Tom Salemi, editor of The Venture Capital Analyst newsletter for the healthcare industry. The sector will certainly have its chance. More than half of the IPO deals scheduled for debut in October are biotech.

As for the fourth quarter, industry watchers are optimistic. There are 12 tech and biotech companies in the IPO pipeline. There is wide speculation that Google will file to go public soon. Online travel company Orbitz set its IPO price October 21 and hopes to raise $125 million (Orbitz lost $5.3 million on sales of $107.8 million in the first six months of 2003). “We have gotten the healthy companies to a stage where they are ready,” said Ted Schlein, a partner with Kleiner Perkins Caufield & Byers, at a recent venture capital conference. However, the consensus among a handful of VCs is that the average time between initial funding round to exit will now be about five to seven years.

One company waiting at the gate is Callidus Software, a San Jose, California-based financial software maker founded in 1996. The company filed to go public September 23 and hopes to raise $75 million. Its balance sheet looks promising. The company’s revenues are strong; it reported $26.6 million in sales for the year ending December 31, 2002 and $29.8 million in just the first six months of 2003.

Yet even with improved sales and profitability, stronger IPO results and a healthier fleet of companies in the pipeline, Mr. Reyes says that the IPO market is fragile. “It would just take another corporate governance scandal or another geopolitical event to throw the recovery off,” he says. But for now, “I think we are seeing better results. Overall, there is optimism.”