When specialty chip maker Audience Inc went public in May this year, investors jumped at the opportunity to invest in a supplier to Apple Inc and ride the coattails of its success in the consumer electronics market.
But when Audience announced last week that its technology was unlikely to be used in the new iPhone, the stock plunged more than 60 percent and is now an example of the perils of investing in small companies that rely on one or two big clients for the bulk of their business.
"Companies that have massive concentration with one customer and without really strong checks and balance on that customer relationship, it's a risk," said Jeremy Levine, a partner with Bessemer Venture Partners and not an investor in Audience.
Mountain View, California-based Audience makes chips that improve the voice quality in mobile devices by filtering out background noise. It went public in May at $17 per share, or a valuation of roughly $330 million.
Audience "shows how dangerous some of these IPOs can be," said Timothy Loughran, a finance professor at the University of Notre Dame. "Just one quick announcement can blow up the stock. Some of these companies are less developed and haven't yet gotten a large client base."