July 2, 2008 — 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 five 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% 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 three years ago.
• The three largest factors to which venture capitalists attribute the current IPO drought are: 1) Skittish investors (77%), 2) Credit crunch/mortgage crisis (64%), 3) Sarbanes-Oxley regulation (57%)

Only 8% 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% 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% from its three-year high of 72 companies in Q3 2007.