The Market is in Slow Motion

By Azam on January 5, 2009

In 2008, venture capital backed firm had a very hard time heading towards the exit. The market deteriorating and heavily impacted due to financial crisis added a serious barrier for the venture backed tech sectors as well . In 2008 venture-backed companies generated $24.1 billion through initial public offerings (IPOs) and mergers and acquisitions (M&As), down 58 percent from $57.6 billion in 2007, according to VentureSource

The number show the demise and closing window of opportunity of the public markets. Only six venture-backed start-ups went public last year, the fewest since 1977 and down from 86 in 2007, according to data released Monday by the National Venture Capital Association and Thomson Reuters. Venture capitalists sold 260 companies in 2008, down from 360 in 2007.

Stock market investors do not want to invest in initial public offerings, said Mark Heesen, president of the association. And “potential acquirers have just become much more conservative in buying — stock prices are so volatile that they don’t know how much money they have.”

The few companies that did go public have performed poorly. They raised $470 million in their public offerings, the lowest amount since 1979 and down from $10 billion in 2007. As of Dec. 31, only one company, CardioNet, which makes technology to monitor cardiac patients’ hearts outside of hospitals, was the only firm that went public trading above the water mark.

The M& A market is more attractive as falling share prices and lower valuations lower levels. Investors have been more successful financially and reported almost half of the companies acquired returned more than 4x returns on capital invested, according to venture capital association report. The largest sale of the year occurred when Dell bought EqualLogic, which makes storage systems for virtualization, for $1.4 billion in January 2008.

The current environment has the potential to be further impacted with institutional investors scaling back from funding commitments. Also, early stage firms are facing harder time raising capital as future is more uncertain. Investors are looking for actual revenues and some are more interested in debt as dismal returns from equities may continue into the new year.

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