The dearth of IPOs for venture-backed companies has reached crisis proportions, according to the
In the second quarter, there were no venture-backed IPOs—the first time that has happened in a quarter since 1978, according to an exit report published last week by the NVCA and Thomson Reuters. The last time things looked nearly so bleak was during the first quarter of 2003, when just one VC-funded company went public.
Nor is there great optimism that conditions will improve, according to a survey of more than 660 NVCA members carried out last quarter. A total of 81% of respondents said they do not expect to see the IPO window open up in 2008. Two-thirds of the VCs also said they believe that venture-backed companies are less likely to want to go public today than they did three years ago.
“The psychological shift has taken place where entrepreneurs are reevaluating what was once a no-brainer decision to take their company public on Nasdaq or the New York Stock Exchange,” says Dixon Doll, NVCA Chairman and co-founder and general partner of
NVCA President Mark Heesen says that he viewed the recent quarter as the “canary in the coal mine” and that the venture industry needs to make legislators and regulators aware that the dearth of new offerings represents a “serious problem that will have long-reaching economic implications if not addressed.”
The venture industry’s lobbying strategy will rely heavily on boosting its image as a job-creation engine. The NVCA issued a report last year in conjunction with consultancy Global Insight that found that companies that were once venture-backed, and are now publicly traded, account for 10.3 million jobs and 18% of U.S. gross domestic product.
The NVCA also has been lobbying for Sarbanes-Oxley (SOX) reform for several years as the cost for small companies to go public has risen. The NVCA and critics of the financial reporting measure say that its cost, coupled with a decreased market appetite for smaller cap and technology companies, has made it significantly more difficult for venture-backed companies to go public.
Still, VCs don’t believe SOX is entirely to blame. Asked by the NVCA for the main reason for the IPO draught, 77% blamed “skittish investors,” 64% blamed the credit crunch/mortgage crisis and just 54% blamed SOX.
At the same time, the median age of a venture-backed company from founding date to IPO hit a 27-year high in 2007 at 8.6 years, according to the NVCA.
“You certainly have to be prepared to stay private longer,” says Robert Kibble, managing partner at San Diego-based
Today, fewer venture-backed companies are in registration to go public. As of the end of June, there were 42 venture-backed companies that had filed for an IPO with the Securities & Exchange Commission and were still “in registration.” This number is down 40% from its three-year high of 72 companies in the third quarter of 2007.
But not all VCs are convinced that the IPO drought warrants crisis status. Paul Kedrosky, a venture investor with
“Venture capital is a cyclical, bubble-driven business, and it is between bubbles,” Kedrosky wrote. “Sarbanes-Oxley hasn’t helped, admittedly, but that is not the core issue. Among other things, the industry hasn’t been able to find enough companies about which Wall Street can get excited.”
M&A dips in Q2
In contrast to the non-existent IPO market, venture-backed M&A activity remained reasonably active in the second quarter, although the number and disclosed value of acquisitions involving venture-backed companies dipped in the second quarter of 2008.
A total of 50 venture-backed M&A deals were completed in the second quarter. Of those, 14 had disclosed valuations, with an aggregate deal value of $2.4 billion. In the first quarter of 2008, 56 venture-backed M&A deals were completed, of which 20 had an aggregate deal value of $2.5 billion.
Overall, M&A volume of 120 transactions in the first half of 2008 was down 28% from the first half of 2007 when 169 transactions were completed. The average disclosed deal value for the quarter was $171.2 million, with no acquisitions valued above $850 million in Q2.
“When you think about M&A above $1 billion in the technology space, that has really slowed down,” says Michael Guptan, managing director and head of technology investment banking at
The information technology sector dominated the venture-backed M&A landscape last quarter, with 36 deals and a disclosed total dollar value of $1.8 billion. Within this sector, computer software and services companies accounted for the bulk of the target companies, with 15 transactions, according to Thomson Reuters. Life sciences deals accounted for three exits with disclosed value for one transaction of $53 million.
Social media was among the standout sectors. Bebo, a social networking site operator, brought in the quarter’s largest M&A exit. AOL completed its acquisition of the company in May in a deal valued at $850 million.