The National Venture Capital Association has made official what most observers already knew: 2002 was a dismal year for initial public offerings, with just 22 venture-backed companies debuting in U.S. stock markets. Those firms raised a collective US$1.9 billion.
In comparison, 35 companies held IPOs in 2001, raising a total of $2.8 billion in the process.
And although the report from the NVCA and Thomson Financial said the traditionally quiet fourth quarter showed some improvement, they expect 2003 will be another slow year for venture-backed IPOs.
“A lot of outside factors will play into how quickly the market recovers, but for venture-backed firms, it’s probably going to take a bit longer,” NVCA vice president Jeanne Metzger told the E-Commerce Times. “Those firms tend to be more high-tech and speculative, so it’s going to take time for them to get the traction they need to become profitable.”
Unlike in the late 1990s, Metzger said, most firms now must demonstrate profitability for at least one or two quarters before investors will take their initial public offering seriously. “The rules changed a bit [in the late 1990s], but they’re back to the basics now,” she noted. “It might be another two or three years before the venture-backed IPO market is back in full gear.”
Reasons for Optimism
In the last three months of 2002, four IPOs were staged, raising a total of $230 million. In stark contrast, the third quarter saw just one venture-backed firm hit the public markets, raising $30 million.
Despite the fourth-quarter improvement, the IPO market remains virtually stalled compared with recent years. For instance, in the last quarter of 2000 alone, 23 venture-backed companies went public — more than in all of 2002.
Even in the fourth quarter of 2001, when reverberations of September 11th were still being felt on the stock market, 14 venture-funded companies managed to stage IPOs.
The dearth of IPOs among venture-backed firms has had a ripple effect, reducing initial and follow-up investments in new startups because venture capitalists cannot unlock their previous investments. In fact, the third quarter saw venture funding tumble to its lowest levels since 1998, dropping below $5 billion, according to a report released by PricewaterhouseCoopers, Venture Economics and the NVCA.
Metzger said that new investments may be insulated from a lack of IPO returns because they have 5- to 7-year time horizons — meaning the economy is likely to improve by the time these companies are ready to go public. Even so, she added, the down market has forced venture firms to be more selective, choosing portfolio firms that are most likely to achieve success in the short term.
Not Half Bad
Several e-commerce companies managed to sneak through the narrowing IPO window in 2002. PayPal went public early in the year, only to be scooped up by eBay shortly afterward. Online DVD rental firm Netflix and closeout e-tailer Overstock also managed to stage offerings in an otherwise moribund market.
Still waiting in the wings is the IPO of controversial travel site Orbitz. Orbitz notified the U.S. Securities and Exchange Commission in May that it intended to go public but has yet to move forward with the offering.