NYT: Venture Investors Wrap Up an Unusually Bleak Quarter

posted by Dustin

June 28, 2008

Venture Investors Wrap Up an Unusually Bleak Quarter

By MATT RICHTEL

SAN FRANCISCO — So far this has been a challenging year for companies hoping to go public. But it has been even rougher on venture capitalists who were hoping to get a big payday from such an offering.

In the second quarter of this year not a single company backed by venture capitalists has gone public. It is the first time that has happened since 1978, according to a venture capital industry group.

General weaknesses in the financial markets have kept many companies from taking the plunge. But venture capitalists say they have started to back technologies like alternative energy that take relatively long to gestate before they are ready for the public market.

Some other venture capitalists say the industry is struggling to find its direction and has never fully recovered from the dot-com bust.

That may come as little surprise to the well-heeled individuals and institutions that give their money to venture capitalists seeking big returns. Some of these investors have criticized venture capitalists for failing to provide substantial returns on a broad basis since 2000.

Public offerings serve a critical role for venture capitalists by giving them a way to sell, at huge profits, stakes in the start-up companies they invest in and build. So the offering drought is being taken very seriously by the venture capital industry. The National Venture Capital Association, an industry group, said it planned to discuss the issue on Tuesday in a media blitz on television news outlets.

"It's a big story," said Emily Mendell, a spokeswoman for the group. She declined to discuss the problem further, saying that the industry would release its official analysis on Tuesday, after the end of the quarter.

Nancy Pfund, a veteran venture capitalist with DBL Investors in San Francisco, said the absence of venture-backed offerings in the quarter was surprising, but the reasons behind it were not hard to understand.

She said there were two overriding factors. Wall Street is being very selective in taking companies public, and blessing only those with particularly high revenue and growth projections. And venture capitalists are wary because they worry that their returns will be limited in a depressed market.

"It's not a good time to go out," she said. "No one's going to appreciate the value you've created, and it's such a high bar."

Ms. Pfund is an investor in a number of alternative energy start-ups, like Solar City, which does solar panel installation. She said the company had blossomed and was on pace to more than double last year's revenue of $26 million, but she said that it, like a lot of energy start-ups, was simply too early in its development to go public.

Indeed, some venture capitalists are arguing that the pipeline for public offerings has dried up in part because of the considerable shift in the industry's interest in the last three years into "green" technologies, which was taking time to bear fruit.

But Paul Kedrosky, an investor and the author of Infectious Greed, a venture capital-centric blog, said that there were deeper, more systemic problems for venture capitalists in addition to the cyclical challenges. He said part of the problem was that the industry was backing companies that lack widespread investor appeal, like YouTube clones and dating and social networking sites.

"There is nothing that the industry is producing that investors want," Mr. Kedrosky said. "The stuff they're investing in is idiosyncratic — it's fun and appealing to them but Wall Street doesn't care."

"The Valley is operating in its own little world, and the capital markets don't care about the things that are getting the Valley excited."

Over all, the market for public offerings has been in a funk. So far this year there have been 36 offerings, down from 130 during the same period last year, according to Renaissance Capital, a research firm based in Greenwich, Conn.

"Deal volume has fallen off a cliff," said Paul Bard, head of research for Renaissance.

The public offerings this year raised $27 billion, but Visa's offering accounted for $18 billion of that. Mr. Bard said there was likely to be a sharp drop in the amount raised this year from last year's $60 billion.

Mr. Kedrosky said the problems were particularly acute for venture capitalists — and that leaves them with some answering to do to their own investors.

"Here's an industry struggling in a big way to hang onto its investors, let alone find new ones," Mr. Kedrosky said. "They've been hanging on by their fingernails."

The lack of a good way to cash out just makes things worse, he said. "There is no venture industry if there is no I.P.O. market."