The market for initial public offerings (IPOs) in the US has ground to a halt.
For the first time in three decades, not a single company there went public in the second quarter, according to data released Tuesday by the National Venture Capital Association and the Thomson Reuters research firm.
Tough days: A file photo of the NYSE trading floor
IPOs are considered a measure of health for the venture-backed entrepreneurial start-ups that fuel the economy of high-tech centres such as the Boston area and California’s Silicon Valley.
The drought in IPOs comes as the US economy hangs on the brink of a recession and some stock indexes have retreated to levels not seen since 2006. Following a sluggish first quarter, the absence of IPOs in the three months ended Monday left the number of public offerings in the first half of 2008 at five, down from 43 a year ago.
That’s put pressure on venture capital firms, which bankroll early-stage companies, to focus on mergers and acquisitions as their only viable “exit strategy” for start-ups in their portfolios. But sales of venture-funded companies have also been slowing down.
“There’s a drought,” said Daniel J. Nova, managing general partner at Highland Capital Partners in Lexington, Massachusetts. “There’s more supply than demand. I think we’re hitting bottom with regard to exits.” Among the factors cited in a survey by the venturecapital trade group were skittish investors, the ongoing credit crunch and mortgage crisis, and the Sarbanes-Oxley law, which drives up the price to public companies of complying with financial reporting rules.
Mark G. Heesen, president of the venture capitalist group, said, “We’re concerned. We’ve now had a full half-year when we’ve had only five IPOs. We’ve surveyed our members, and 80% don’t expect the IPO market to recover in the second half of this year or the first half of 2009. And this is from a group of optimists.”
That means companies that registered for IPOs in the past year, including Massachusetts start-ups Gomez Inc. of Lexington, Woburn’s LogMeIn Inc. and Biotrove Inc., NameMedia Inc. of Waltham, and GlassHouse Technologies Inc. of Framingham, may have to scrap their plans or delay going public until the IPO window reopens.
Heesen said the average length of time from initial funding to IPO has reached a record high of 8.6 years, up from 6.5 years in the recent past and 4.5 during the dot-com boom of the late 1990s. “Most venture capitalists can hold onto a company for six or six-and-a-half years,” Heesen said. “But if you add on another two years, they’re going to have less time to be out there funding new companies.”
While many start-ups continue to sell for hefty prices to bigger technology or life sciences companies, the lack of an IPO option, if it continues, could depress prices, Heesen warned. The IPO drought also could hurt technology hubs, such as Boston, in their efforts to nurture and grow more home-based giants. “We really need more companies going public,” Heesen said.
Nova, of Highland Capital, said the drying up of the IPO market hasn’t kept high-tech start-ups from raising money, building their businesses and expanding customer bases. “Fundamentally, our tech companies are continuing to do fairly well,” Nova said. “We aren’t seeing a significant pull back in technology buying.”
But the danger is that a decline in IPOs, historically the most lucrative exit for start-ups, could deprive venture fund investors such as pension funds and endowments of strong returns, and new companies of expansion capital, said Tom Crotty, general partner at Battery Ventures in Waltham. The IPO market, he said, isn’t likely to rebound until the stock market hits bottom and begins climbing back.
“It’s the macro environment that’s whacking the venture industry over the head,” Crotty said. ”The most fundamental problem is that people who buy securities aren’t in any mood to assume risk.” ©2008/The Boston Globe