IPO Drought Creates Capital Market Crisis for Start-Up Community
NEW YORK, July 1 /PRNewswire-FirstCall/ -- For the first time since
1978, there were no venture-backed Initial Public Offerings (IPOs) in the
second quarter of 2008 according to the Exit Poll report by the National
Venture Capital Association (NVCA) and Thomson Reuters. The absence of any
offerings this quarter follows an exceptionally slow first quarter when
only 5 venture-backed companies went public. This number is a fraction of
the first half of 2007 when 43 companies went public. According to the
NVCA, the situation is concerning enough to be characterized as a capital
markets crisis for the start-up community.
"Venture-backed companies that successfully enter the public markets
represent a critical job creation engine for the United States economy, and
that engine has completely shut down," said Mark Heesen, president of the
NVCA. "We need to put regulators, legislators, presidential candidates, and
the private sector on notice that this situation represents a serious
problem that will have long reaching economic implications if not
addressed. We view this quarter as the 'the canary in the coal mine'."
During the week of June 23, the NVCA surveyed its membership on the
current IPO drought. The 660 plus responses that were received from venture
capitalists across the country reinforced the concerns of the association,
specifically:
-- 81 percent of venture capitalists do not see the IPO window opening in
2008.
-- Two-thirds of venture capitalists believe that venture-backed companies
are less likely to want to go public today than they were 3 years ago.
-- The three largest factors to which venture capitalists attribute the
current IPO drought are:
-- Skittish investors (77 percent)
-- Credit crunch/mortgage crisis (64 percent)
-- Sarbanes Oxley regulation (57 percent)
-- Only 8 percent of venture capitalists characterize the current IPO
drought as "not critical" to the future health of the venture capital
and entrepreneurial communities.
Dixon Doll, co-founder of Menlo Park based DCM and current NVCA
chairman remarked, "While we clearly recognize that the IPO drought is
being driven largely by a weak economy, there are other systemic factors
that are making the IPO exit less attractive for high quality
venture-backed companies. Our government and the private sector should be
doing all that it can to encourage these innovative, high quality companies
to enter the public markets and grow from there. The acquisition will
always be an attractive and viable exit path for venture-backed companies,
but the public offerings create visible, long term economic growth. Imagine
the implications if Genentech, Google, or Intel decided to forgo a public
offering and become acquired because the public market option was
unappealing. The "next Genentech or Google" may be making that decision
right now. The best choice for that company should also be the best choice
for our capital markets system and our economy."
Companies that were once venture-backed but are now public account for
10.3 million jobs and 18 percent of US GDP, according to a 2007 Global
Insight Report.
The NVCA has been advocating for Sarbanes Oxley reform for several
years as the cost for small companies to go public has risen dramatically
under the law. This cost, coupled with a decreased market appetite for
smaller cap companies, a lack of analyst coverage, and a lower investor
appetite for technology stocks, has raised the bar considerably for
venture-backed companies hoping to go public. The median age of a
venture-backed company from founding date to IPO hit a 27-year high in 2007
at 8.6 years.
As of 6/30/2008, there were 42 venture-backed companies that have filed
for an initial public offering with the SEC and are currently "in
registration." This number is down 40 percent from its 3-year high of 72
companies in Q3 2007.
Venture-Backed Liquidity Events by Year/Quarter, 2001-2008ytd
M&A Average
Deals *Total *Average Total IPO
Total with Disclosed M&A Deal **Number Offer Offer
M&A Disclosed M&A Value Size of Amount Amount
Quarter/Year Deals Values ($M) ($M) IPO's ($M) ($M)
2002 318 152 7,916.4 52.1 22 2,109.1 95.9
2003 290 122 7,721.1 63.3 29 2,022.7 69.8
2004 339 186 15,440.6 83.0 93 11,014.9 118.4
2005-1 81 45 4,351.9 96.7 10 720.7 72.1
2005-2 81 34 4,725.0 139.0 10 714.1 71.4
2005-3 101 48 18,056.0 376.2 19 1,458.1 76.7
2005-4 87 39 2,594.0 66.5 18 1,592.1 92.2
2005 350 166 29,727.0 179.1 57 4,485.0 78.7
2006-1 107 52 5,607.5 107.8 10 540.8 54.1
2006-2 105 40 4,018.5 100.5 19 2,011.0 105.8
2006-3 94 42 3,894.8 92.7 8 934.2 116.8
2006-4 62 26 5,616.8 216.0 20 1,631.1 81.6
2006 368 160 19,137.6 119.6 57 5,117.1 89.8
2007-1 82 29 4,540.3 156.6 18 2,190.6 121.7
2007-2 87 36 3,972.3 110.3 25 4,146.8 165.9
2007-3 100 52 10,810.0 207.9 12 945.2 78.8
2007-4 86 43 9,084.1 211.3 31 3,043.8 98.2
2007 355 160 28,406.7 177.5 86 10,326.3 120.1
2008-1 70 28 3,602.4 128.7 5 282.7 56.5
2008-2 50 14 2,397.3 171.2 0 0.0 n/a
2008 120 42 5,999.7 142.9 5 282.7 56.5
Thomson Reuters & National Venture Capital Association
* Only accounts for deals with disclosed values
** Includes all companies with at least one U.S. VC investor that trade on
U.S. exchanges, regardless of domicile.
Mergers and Acquisitions Volume Declines
In the second quarter of 2008, 50 venture-backed M&A deals were
completed, 14 of which had an aggregate deal value of $2.4 billion. M&A
volume of 120 transactions in the first half of 2008 was down 28 percent
from the first half of 2007 when 169 transactions were completed. The
average disclosed deal value for the quarter was $171.2 million.
The Information Technology sector dominated the venture-backed M&A
landscape, 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 across
this sector subset. Non-High Technology saw the next highest level of
activity with 11 deals and a combined disclosed value $536.9 million.
Finally, Life Sciences deals accounted for 3 exits with disclosed value for
one transaction of $53.2 million.
Venture-Backed M&A Industry Breakdown
Q2 2008
Number of
Venture-
Number of Backed M&A
Venture- deals with a Total Disclosed
Backed disclosed Venture-Backed
M&A deals value Deal Value ($M)
Communications
and Media 6 2 394.3
Computer Software
and Services 15 3 443.0
Internet Specific 7 3 963.0
Semiconductors/
Other Elect. 7 1 6.9
Computer Hardware 1 - -
Information
Technology TOTAL 36 9 1,807.2
Biotechnology 1 1 53.2
Medical/Health 2 - -
Life Sciences TOTAL 3 1 53.2
Other Products 6 2 475.5
Consumer Related 2 1 44.0
Industrial/Energy 3 1 17.4
Other TOTAL 11 4 536.9
TOTAL 50 14 2,397.3
Source: Thomson Reuters & National Venture Capital Association
The largest transaction of the quarter was the acquisition of social
networking site operator Bebo, Inc. by AOL LLC. The transaction, valued at
$850 million, was completed in May.
Deals bringing in the top returns, those with disclosed values greater
than four times the venture investment, accounted for 55 percent of the
total compared to 52 percent last quarter. Those deals returning less than
the amount invested accounted for 27 percent of the quarter's total,
compared to 26 percent of the total last quarter.
Analysis of Transaction Values versus Amount Invested
Relationship between transaction value Q108 Q208
and investment M&A** M&A**
Deals where transaction value is less than
total venture investment 6 3
Deals where transaction value is 1-4x total
venture investment 5 2
Deals where transaction value is 4x-10x
total venture investment 8 4
Deals where transaction value is greater
than 10x venture investment 4 2
Total Disclosed Deals 23 11
Source: Thomson Reuters & National Venture Capital Association
** Disclosed deals that do not have a disclosed total investment amount
are not included.
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About National Venture Capital Association
The National Venture Capital Association (NVCA) represents
approximately 480 venture capital and private equity firms. NVCA's mission
is to foster greater understanding of the importance of venture capital to
the U.S. economy and support entrepreneurial activity and innovation.
According to a 2007 Global Insight study, venture-backed companies
accounted for 10.4 million jobs and $2.3 trillion in revenue in the United
States in 2006. The NVCA represents the public policy interests of the
venture capital community, strives to maintain high professional standards,
provides reliable industry data, sponsors professional development, and
facilitates interaction among its members. For more information about the
NVCA, please visit http://www.nvca.org.
SOURCE Thomson Reuters; National Venture Capital Association
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Related links:
http://www.thomsonreuters.com
http://www.nvca.org http://www.thomsonfinancial.com
CONTACT:
Sandy Anglin, +1-646-822-7334,
sandy.anglin@thomsonreuters.com, or Matthew Toole,
+1-646-822-7560, matthew.toole@thomsonreuters.com, both of
Thomson Reuters; or Channa Luma of The Weiser Group for NVCA,
+1-202-641-6959, cluma@weisergroup.com
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