Venture Investors Wrap Up an Unusually Bleak Quarter - The New York Times

Summary:
Article on the Q2 '08 IPO drought. Causes being suggested are the general weakness in the financial markets; the shift, starting about 3 years ago, to cleantech and alternative energy sectors which needs more time to develop; and the VC industry still struggling to find its direction, never having fully recovered from the dot-com bust. One VC said there are two overriding factors: 1) Wall Street is being very selective in taking companies public, and blessing only those with particularly high revenue and growth projections. And 2) venture capitalists are wary because they worry that their returns will be limited in a depressed market. Another view is that part of the problem is that the VCs have been backing companies that lack widespread investor appeal. The VC industry is hanging by its fingernails. There is no VC industry if there are no IPOs. (Published: 28/06/08)

Notes:

• second quarter of this year not a single company backed by venture capitalists has gone public
• first time that has happened since 1978
• offering drought is being taken very seriously by the venture capital industry
• 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.
  
• Cause?
  
• General weaknesses in the financial markets
  
• have kept many companies from taking the plunge
• VCs say they have started to back technologies like alternative energy
  
• take relatively long to gestate before they are ready for the public market.
• Other VCs say the industry is struggling to find its direction and has never fully recovered from the dot-com bust
• Nancy Pfund, VC at DBL Investors, San Francisco
• 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. No one’s going to appreciate the value you’ve created, and it’s such a high bar.”
• a lot of energy start-ups still too early in their development to go public
• 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
• Paul Kedrosky, author
• deeper, more systemic problems for venture capitalists in addition to the cyclical challenges
• part of the problem was that the industry was backing companies that lack widespread investor appeal
• e.g. YouTube clones and dating and social networking sites.
• “There is nothing that the industry is producing that investors want. 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.”

• “Here’s an industry struggling in a big way to hang onto its investors, let alone find new ones. They’ve been hanging on by their fingernails. The lack of a good way to cash out just makes things worse. There is no venture industry if there is no I.P.O. market.”