Capital Markets

The VCs Strike Out — in Launching IPOs

For the first quarter since 1978, not one offering emanates from the venture community.
Stephen TaubJuly 1, 2008

Bleak market conditions have devastated venture capital operations, which for the first time since 1978 launched not a single venture-backed initial public offering the lastest quarter.

The absence of any offerings in the second period follows an exceptionally slow first quarter when only five venture-backed companies went public, according to a survey from the National Venture Capital Association (NVCA) and Thomson Reuters. This year’s numbers area a shadow of IPO action in the 2007 first half , when 43 companies were taken public.

Further, 81 percent of venture capitalists do not see the IPO window opening in 2008 altogether. In fact, only 8 percent of venture capitalists characterize the current IPO drought as “not critical” to the future health of the venture capital and entrepreneurial communities. As a result, the NVCA has proclaimed the situation as a capital markets crisis for the start-up community.

“Venture-backed companies that successfully enter the public markets represent a critical job creation engine for the United States economy, and that engine has completely shut down,” said Mark Heesen, president of the NVCA, which produced the survey from 660 responses taken from its membership. “We need to put regulators, legislators, presidential candidates, and the private sector on notice that this situation represents a serious problem that will have long reaching economic implications if not addressed. We view this quarter as the ‘the canary in the coal mine’.”

The survey measured the three largest factors to which venture capitalists attribute the current IPO drought as skittish investors (77 percent), the credit crunch/mortgage crisis (64 percent), and Sarbanes-Oxley factors (57 percent).

Of course, a reluctance to go public due to Sarbox does not reflect credit-related or market-related problems. In fact, the NVCA stressed that it has been advocating for Sarbanes-Oxley changes for several years, as the cost for small companies to go public has risen dramatically under the law. This cost, coupled with a decreased market appetite for smaller cap companies, a lack of analyst coverage, and a lower investor appetite for technology stocks, has raised the bar considerably for venture-backed companies hoping to go public, it asserts.

To underscore non-market-related elements cited for not taking companies public, the association pointed out that the median age of a venture-backed company from founding date to IPO hit a 27 year high in 2007 at 8.6 years.

“While we clearly recognize that the IPO drought is being driven largely by a weak economy, there are other systemic factors that are making the IPO exit less attractive for high quality venture-backed companies,” said Dixon Doll, cofounder of Menlo Park, Calif.-based DCM and current NVCA chairman. “Our government and the private sector should be doing all that it can to encourage these innovative, high quality companies to enter the public markets and grow from there.”

As of June 30, there were 42 venture-backed companies that were in registration for IPOs, having filed earlier with the SEC. That number is down 40 percent from its three-year high of 72 companies in registration during the 2007 third quarter.

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