Some are calling it the possible demise of initial public offerings a "venture-backed IPO investment crisis." Others are saying the lack of IPOs in the most recently completed quarter is only natural and just another symptom of the country's battered and bruised economy.
Whether the shortage of IPO filings is either or a bit of both can be debated, but one thing that can't be argued is that this marks the first time since 1978 that there were no venture-backed IPOs in a quarter across the board according to the "Exit Poll" report by the National Venture Capital Association (NVCA; Arlington, Virginia) and Thomson Reuters (New York).
This follows an exceptionally slow first quarter when only five venture-backed companies reported going public — that number but a small fraction of the first half of 2007, when 43 companies went public.
Although the merger & acquisitions trail, a popular means of exit for companies, remains strong, the M&A path has taken a significant pounding of its own. In 2Q08, 50 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% from the first half of 2007, when 169 transactions were completed. The average disclosed deal value for the quarter was $171.2 million. Healthcare deals accounted for three of those exits, with disclosed value for one transaction of $53.2 million.
"Companies have to seek out those M&A routes right now," Wende Hutton, a general partner of Canaan Partners (Menlo Park, California/Westport, Connecticut), told Medical Device Daily. "What I see now is a liquidity dry spell which will affect us in the short term. There have been times in the past where the medical device IPO window has been shut and when the biotech window has been shut the only thing that is different now is that we're seeing sluggish IPO activity across the board."
The obvious question that springs to mind is what has caused such a decline in the once-booming strength of IPOs?
"I think it's a reflection of all the economic levers," Hutton told MDD, referencing the price of oil, the increase in food and commodities, the credit crunch and mortgage crisis.
In their national survey of dealmakers, Thomson Reuters and NVCA found that the majority of respondents claim nervous investors as the major reason for the IPO drought, followed by the credit crunch and the burden of Sarbanes-Oxley reporting requirements.
Sarbanes-Oxley was enacted on July 30, 2002, and put in place enhanced standards for all U.S. public company boards, management and public accounting firms. Private companies are not subjected to this law.
"I think (Sarbanes-Oxley) is certainly a factor (for the IPO slump)," she said. "Are companies unduly burdened by Sarbanes-Oxley? Yes. Once you set a company on the IPO course, all the documentation and regulations that the company has to go through can cost $1 million and up."
And to pour even more salt onto the wound, DowJones VentureSource reports that since March, when the last public offering for a venture capital-backed U.S. company was completed, 10 companies have withdrawn IPO registrations.
"There are not as many banks out there that are willing to take these emerging companies into the public market," Hutton said.
Although the IPO heyday spanning from the late 1990s toward the beginning of the new millennium that saw 200 companies go public in a year probably will never return, there is some sort of middle ground for the companies.
Nearly 1,400 venture-backed firms went public from 1991 through 1997. But from 2001 through 2007 that number was around 400.
"I wouldn't call it a crisis," Hutton told MDD. "Fortunately for us we've got a very robust and resilient market in medical devices and pharmaceuticals. No one has stopped using medical devices; no one has stopped using (pharmaceuticals). Healthcare is still a pretty strong investment."
Venture capitalists also have to be more patient to reap profits from companies they finance. Typically venture capitalist gain the most when the companies sell stock to public investors, but now it takes an average of 8.6 years for a company to obtain this feat. That's the longest it's taken in 27 years, according to the NVCA.
The problem with venture-backed IPOs has stretched far beyond U.S. borders.
Preliminary Thomson Reuters data had shown that Asia's IPO market was headed for its worst second quarter since 2003, as global market turmoil saw IPOs pulled or priced at steep discounts to peers.
"Venture-backed companies that successfully enter the public markets represent a critical job creation engine for the U.S. economy, and that engine has completely shut down," said Mark Heesen, president of the NVCA, in a press release. "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 canary in the coal mine.'"
NVCA first began keeping statistics of IPOs of venture-backed firms in 1991. The lowest number of such moves it recorded came in 2002, when 22 such companies went public. But it is hard to tell at this point if VC-related activity in 2008 will match or overpower the 2002 statistics.
According to a NVCA survey of 660 financiers, that number could be even less. About 81% of those in the survey said they do not see the IPO window reopening until 2009.