Startup IPO Drought Is Longest for at Least 38 Years

Bloomberg, April 1, 2009

By Tim Mullaney

April 1 (Bloomberg) -- No startups staged initial public offerings for a second quarter in a row, marking the first time in at least 38 years that six months have passed without an IPO of a venture-capital-backed company.

The market for selling startup companies also fell by about half last quarter, the National Venture Capital Association said in a report today. Mergers fell to 56 deals from 106 in the same period last year. The average value of sales where prices were disclosed fell to $49.6 million from $113.6 million.

The collapse of the two main ways for venture capitalists to cash in is inhibiting the market for new investments, NVCA president Mark Heesen said in an interview. The quarter brought signs the situation may get worse, he said. Six venture-backed companies that had planned to go public withdrew their regulatory filings during the quarter.

"It’s that bad because there is simply no confidence among the investing public," Heesen said. "Everyone is looking for stability and no one has found it yet."

The quarter was the third in the past five with no venture- backed IPOs, NVCA said. Only six venture-backed startups went public in 2008. The last, computer services company Rackspace Hosting Inc., sold shares for $12.50 each in August and closed yesterday at $7.49 in New York Stock Exchange composite trading.

The six-month period with no venture-backed IPOs is the first since the NVCA began collecting data in 1971, Heesen said.

Money-Losing Investments

"That’s why they call it venture capital," said Lise Buyer, a former venture capitalist and technology analyst who consults companies considering IPOs. "It doesn’t always work."

The merger market may be even more discouraging, Heesen said. Of the 13 mergers last quarter whose values were announced, seven brought prices that were less than venture capitalists had invested.

Only three commanded more than four times the sum invested, and none fetched 10 times that. Venture firms rely on isolated big payoffs to offset the many startups that fail, Heesen said.

"It comes down to making your limited partners want to stay in venture capital, and if you don’t have acquisitions and IPOs you’re not going to satisfy them," Heesen said. "This has to change."

Venture capitalists are telling their backers to be patient, said Matt McIlwain, managing director at Seattle-based Madrona Venture Group. His firm is also paying less for its investments, and is providing follow-up funding to its existing companies if they have trouble getting growth capital from other venture investors.

Investors Unconvinced

Acquisitions are being held back by the startups’ inability to convince buyers that they can meet growth forecasts, McIlwain said. And acquirers know they have all the leverage in merger talks, he said.

"In a market where people don’t know if they’ll make the next quarter, you can’t get them excited about 18 to 24 months," McIlwain said. "We know that the corporate- development departments of large companies have bottom-fishing initiatives and mandates under way."

The IPO market often reacts to economic turmoil by declining more than stocks overall, said Francis Gaskins, publisher of the IPO Desktop newsletter in Marina del Rey, California. This slowdown was worsened by the speed and breadth of the economic decline last year, he said.

"There’s a contraction of both consumer and business activity," Gaskins said. "This whole thing happened so quickly over the last 18 months that IPOs went over a cliff. And there’s global overcapacity that made everything worse."

The IPO bust’s impact on investment in startups began to show up last year. Fourth-quarter investments in new companies dropped 33 percent to $5.4 billion. NVCA is set to release first-quarter numbers April 18.

Venture investment in so-called clean technology companies, which had been growing at more than 50 percent the past two years, fell 48 percent in the first quarter, the accounting firm Deloitte and the consulting firm Cleantech Group reported today.