First time that's occurred since '78
By DEBORAH GAGE
SAN FRANCISCO CHRONICLE
The market for initial public offerings in the U.S. hit a 30-year low last quarter, making it harder for startups to find exits and for venture capitalists to return money to investors, according to a new report.
For the first time since 1978, there were no venture-backed IPOs at all in that time period, and the pace has barely picked up since.
The money raised by IPOs in the first quarter of 2008 fell to $283 million compared with $2.2 billion during that same time in 2007.
Venture-backed mergers and acquisitions also are down. In the first half of 2008, the number of deals dropped 29 percent compared with the same period last year, and they also raised less money -- $6 billion for deals of disclosed value in 2008 compared with $8.5 billion in 2007.
The report predicts a shakeout of venture capitalists if the hard times continue.
"We're seeing the beginning of where (only) the strongest venture capitalists will survive," said Tracy Lefteroff, global managing partner of PricewaterhouseCoopers' venture capital and private equity practice, which issued the report. "Those with returns will continue to be a viable business, and those that don't will go do something else."
Venture capitalists continue to raise money and invest, especially in clean technology and life sciences companies. They invested around $62 million more in the first half of 2008 than they did last year.
But the way venture capitalists do business will have to change, Lefteroff said, because it's too hard to get big returns from any one company when the public markets are shut down.
The time from seed funding to exit -- either through a public offering or a merger or acquisition -- has doubled in the past decade to 8.6 years.
Venture capitalists' costs will go up and their returns are likely to go down, the report said.
They will have to invest more money per company and there will be fewer -- although bigger -- initial public offerings.
That's because companies that go public will need market capitalizations of at least $500 million to afford to comply with regulations imposed by the Sarbanes Oxley Act of 2002 and attract coverage by equity analysts, which is important for staying in business.
Rather than taking companies public, venture capitalists may instead provide a pipeline for companies to get acquired, the report said. But the returns on that method are generally lower.
Venture capitalists disagree about when the economy will recover. According to data from the National Venture Capital Association, some think it will take as long as two years. If the tough economy continues, Lefteroff also predicted a shakeout for startups.
"You're going to pick the best ones in your portfolio and those are the ones you'll support," he said. "There will be some tough decisions."
In the meantime, it's a buyer's market for companies looking to acquire startups. Claudia Fan Munce, the managing director of IBM Venture Capital Group, said more venture-backed companies are approaching IBM for partnerships or acquisitions -- even after initially turning them down.
When there is a recovery, clean technology companies will lead the way, the report said, although Lefteroff is betting on life sciences companies. With the sequencing of the human genome, he said, life sciences may drive innovation for the next 20 years the way information technology has during the past 20 years.