Healthy Tech IPO Market Is Years Away

There’s good news and bad news for the venture capital community. The good news: Venture capitalists think the overall harsh economic environment has bottomed out. The bad news: There’s no indication that VCs will rush back into the market. That’s according to Graham Watson, managing director at Deloitte & Touche Corporate Finance LLC, which just released its quarterly Silicon Valley Venture Capital Confidence Survey.

Deloitte’s most recent survey is its sixth since it launched its survey program in the first quarter of 2001. This quarter, it received 100 responses from area VCs.

“One thing that stood out to me is that most VCs don’t expect a substantial increase in investment activity this year,” says Bill Nolan, survey participant and managing director of Crosslink Capital. Throughout 2001, 49% of the VCs polled made two or fewer investments. According to the survey, almost mirroring last year, only 40% of VCs expect to invest in two or fewer companies this year.

When asked if compared to historical conditions, the time period required to close a round of funding has increased, more two-thirds of VCs agreed, 65% pegging the time between the first meeting to the signing of the term sheet at two to four months.

Furthermore, these venture prognosticators don’t predict the world will become any friendlier, at least not any time soon. Only 5% of the surveyed VCs forecast that a return of a healthy initial public offering market for technology companies would come in 2002. Most of them, a whopping 85%, predict that relief would come in 2003 or 2004. However, 10% don’t expect liquidity events for tech companies to rebound until 2005 or after.

“I would clearly concur that the economic recovery and pickup of IT spending is closer to 2004 than to 2003,” Nolan says.

However, VCs have decided the situation can’t get much worse. Most predict that the overall economic climate, exit valuations and time spent on portfolio companies would either ease or stabilize. Only 5% of respondents expect the economic climate to decline, while 10% expect exit valuations to decrease.

“My view is that things getting to a bottom point is a nice harbinger for the industry,” says Curtis Feeny, managing director and head of the Palo Alto, Calif., office of Voyager Capital. “As soon as people don’t think it’s going to be any worse, they start looking up.” Feeny adds that VCs may be willing to take more chances on companies when they perceive some window of hope.

A few answers may reflect the situations of the individual survey recipients. When asked about the most important factor behind a recovery in VC investment levels, 57% of VCs pointed to an increase in technology spending as the most important factor, and 38% named a recovery in public market values as tops.

These answers may be stage-dependent, with VCs who invest in later- stages companies showing more dependency on the IPO and acquisition markets.

In addition, VCs were split virtually evenly over whether limited partners’ activism would have a substantial or minimal impact on the VC climate.

“I think the LPs in a lot of general cases weren’t getting treated in a way the GPs would want to be treated if they were in their shoes,” says Feeny, who had a long tenure as an LP with Stanford Management Co. before joining Voyager.

The industry participants interviewed in this article say the results show that VCs are returning to a more traditional and cautious investment pace.

“The challenge of young companies is to get themselves funded to the level where that are attractive to VCs,” Watson says.

Contact Charles Fellers at