Exits Becoming Scarce on VC Highway

Still no sign of improvement as the U.S. enters the third quarter of its initial public offering (IPO) drought.  Just one venture-backed company made an IPO exit in the third quarter of 2008, according to a release from Thomson Reuters and the National Venture Capital Association (NVCA). Mergers and acquisitions (M&As) also were down 43 percent from the same quarter last year. NVCA explains that this slowdown is attributable to both the crisis in the financial markets and to a longer-term reduction in the number of exits. If this trend continues, they warn that capital could become scarce for companies seeking first time investments.

Since the beginning of the calendar year, which coincides with the start of the drought cited by NVCA, there have been only six venture-backed IPOs and 199 M&As. By this same time last year, 55 venture-backed companies had made an IPO and 271 had been acquired. Many later-stage venture-backed companies are choosing to delay an IPO exit until market conditions improve. Similarly, larger corporations are postponing merger and acquisition activity in the near-term. 

Mark Heesen, president of NVCA, believes that if this situation continues into 2009, entrepreneurs can expect capital to become more difficult to secure. Venture firms would have to spend more capital and other resources maintaining the late-stage companies in their portfolio still waiting for an exit. 

Fund-raising also has begun to slow, with a 29 percent reduction in the number of funds raised from the same quarter last year. The dollar value of these funds was down six percent to $8.1 billion. The industry appears to be continuing a trend toward a smaller number of funds, but those funds that remain will be larger on average than they are now.

Investments, however, are not yet showing signs of decline. Venture firms invested $7.1 billion in the third quarter, about the same as the third quarter of 2007. Seed- and early-stage companies continued to represent just under forty percent of total deals. Heesen notes that this round of investments did not yet reflect the global financial crisis, which could lead to less activity in the next quarter and early next year.

For more information about the IPO drought, visit: http://www.nvca.org/pdf/Q308ExitpollFINAL.pdf