Venture Capital: No light coming in through IPO window
By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER
Friday, February 14, 2003
seattlepi.nwsource.com
The IPO window is not just closed. It is padlocked and boarded up.
Only three companies -- two banks and one automobile insurance firm -- have successfully sold shares to the public this year. None of them is venture-backed. Two are more than 130 years old.
By this time last year -- considered the worst year for new offerings in more than two decades -- eight companies had already gone public, according to IPO Monitor.
At the current pace, fewer than 30 IPOs could be completed this year. That compares with 83 last year, 94 in 2001 and 441 in 2000.
Times are certainly tough in IPO land.
The slowdown is bad news for venture capital firms, which rely on public stock offerings as one of the primary means for cashing out of investments. Without a robust public market, VCs are struggling to find ways to make money.
"Usually the beginning of the year is when people are optimistic," said Mark Heesen, president of the National Venture Capital Association. "We have been saying that the IPO market is not going to open for a while, but it is getting progressively worse instead of better."
The outlook remains pretty bleak, especially in the Pacific Northwest, where only two companies -- a small winery in McMinnville, Ore., and a Spokane life insurance company -- are slated to go public this year. Yamhill Valley Vineyards wants to raise $7 million, a far cry from the blockbuster $100 million high-tech IPOs of the late '90s. Spokane's Western United Holding, which filed to go public last June, has not yet named an offering price.
Even if those companies go public, which is not entirely certain, there is not much hope that other privately held companies will follow in their footsteps. At least that's the view of Michael Butler, managing director of Cascadia Capital. The Seattle investment banker knows of just one Washington state company -- a biotechnology firm -- that is contemplating a public offering this year.
"It is absolutely barren," said Butler. "Normally by the second or third week of January, you are cranking out the IPOs. It has been an unusually bad year."
Fears of war, coupled with the lousy economy, are keeping many companies and investment banks on the sidelines, Butler said. So far this year, only five companies have filed to sell shares to the public. That compares with 16 that had done so by this time last year, according to IPO Monitor.
"I've been in this business 16 years, and this is far and away the worst I have ever seen it," Butler said. "There is no light at the end of the tunnel."
Venture capitalists have abandoned the idea of taking companies public. Instead, they are hoping to cash out through acquisitions, Butler said.
But the merger and acquisition market is not great, either. Acquisitions of Internet-related technology companies fell 15 percent and spending on those companies plummeted 70 percent last year, according to Webmergers.com. Acquisition activity in all sectors dropped 14 percent last year, according to Mergerstat.
"Buyers are really reluctant to pull the trigger right now with so many uncertainties on the horizon," said Tim Miller, president of Webmergers.com. Merger and acquisition "and public equity activity are inextricably linked together because the key determinant is the presence of well-valued stock to use in the transaction. No one has that currency now."
John Taylor, vice president of research at the National Venture Capital Association, is trying to make sense of this troubling situation. He is attempting to figure out how much venture capital money can profitably be invested with the IPO and acquisition markets snarled.
When there were more than 400 new public offerings each year -- as was the case in 1999 and 2000 -- the venture capital industry could invest $50 billion in privately held companies and still make a lot of money on paper.
But now that IPOs have slowed to a trickle, Taylor isn't sure where the comfort zone resides.
"That is the balancing act that needs to be achieved," he said.
The current investment pace of about $17 billion per year -- an 83 percent drop compared with the peak venture investing levels of 2000 -- feels about right to Taylor.
"Even though I don't know that $17 billion is the right size for the industry, my sense is, looking at the exit markets, it probably is," he said. "I don't know if we want to be much larger than that right now."
But if venture investment levels hold steady at $17 billion annually, there is going to be a big problem ahead. After all, many venture firms were started during an era when 400 or 500 IPOs were the norm. It may take years or decades to return to that type of activity.
"If you have a couple years between $15 billion and $25 billion, you don't need 8,800 venture capital professionals and 760 firms to do that kind of work, which is where we are at right now," said Heesen. "So you are going to see a contraction in the industry."
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P-I reporter John Cook can be reached at 206-448-8075 or johncook@seattlepi.com. For more information on Seattle-area start-ups or venture capital firms, visit www.seattlepi.com/venture. |
