A major slowdown in the IPO market is affecting the tech industry, potentially making it harder for start-ups to gain investments, experts at Pricewaterhouse Coopers say.
There were zero venture capital-backed IPOs in the second quarter of 2008, the first time that's happened in 30 years, according to a report titled "The Exit Slowdown and the New Venture Capital Landscape." By contrast, there were five venture capital-backed IPOs in the previous quarter, and 43 in the first half of 2007.
"The tech industry bore the brunt of the negative news here. They typically have done the most IPOs of any sector," says Tracy Lefteroff, a global managing partner of Pricewaterhouse Coopers.
Two clean tech companies broke the shutout streak in the third quarter of 2008, with IPOs from desalination company Energy Recovery and solar-cell equipment supplier GT Solar. But Lefteroff doesn't expect a full recovery until the second or third quarter of next year at the earliest, given the credit crisis and uncertainty about the policies of a new president.
Venture capitalists are still investing at a steady rate, but they may become less willing to invest in capital-intensive start-ups and those that take longer to mature, Pricewaterhouse Coopers says. Stock markets may also become less willing to reward smaller, less mature companies than in previous years.
"In the long run, if VCs aren't able to get liquid on their investments, that's going to significantly hurt their returns," Lefteroff says. "Limited partners are going to be less likely to put money up in new funds that are not generating returns."
Venture capital-backed merger and acquisition deals also slowed down in the first half of 2008, with a couple of notable exceptions: Dell's US$1.4 billion purchase of storage vendor EqualLogic, and AOL's $850 million buy of social networking site Bebo. (View a slideshow of the year's biggest tech acquisitions.) The IT sector did well in merger and acquisition deals relative to other industries, accounting for 77 out of 120 venture capital-backed merger and acquisition exits in the first half of 2008.