Staying Private and Less Liquid Longer

By Azam on July 1, 2008

For the first time in 30 years, not a single venture backed firm has access the public market through an IPO.  The drought is largely attributed to investor skittishness due to financial fallout with sub prime mortgage and economic uncertainty in the current environment.  The venture backed environment is undergoing change in the industry as well.   It is getting tougher to go public and increasing number of firms are merging  or taking longer to exit.

“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 National Venture Capital Association

The numbers

Nearly 1,400 venture-backed firms went public from 1991 through 1997. But from 2001 through 2007, fewer than 400 taped the public markets. 

Also, the average venture-backed company in the U.S. takes 8.6 years from inception to go public, up from less than 4½ years in 1999.

The Alternatives

New firms are taking up the slack from the lack of access to the public markets.  New firms like Advance equities and Revolution Partners are providing capital to firms at later stage through private placements.

Another option, secondary market for venture back companies for selling stake in the start ups is a way for investors to exit stakes held. Industry Ventures is a firm that is involved in buying stake in startup from investors.

Critics argue that the  excessive regulation on public companies is largely to blame on the attractiveness of going through IPO route.  The high cost associated with Sarbanes-Oxley is a strong deterrent and works to delays the option for a number of firms.  The NVCA is asking legislature  to work towards a solution that would make it easier for smaller companies to manage the  costs associated with regulation.

 

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