Venture Investment Wave hits IPO Wall

September 23, 2011

This year has seen much more than the normal tumult in the markets and the impact on venture investment has raised the prospect of yet another period of under-performance in the venture capital industry.  Despite venture capital investment in the U.S. attaining a three-year high through the second quarter, the increasing market volatility and steep stock market declines has many in the venture capital industry concerned over the effect it will have on the IPO market.  It has only been a couple of years since it endured a dreadful IPO environment, and the recent flight to safety by investors has cast a pall over the current conditions for IPOs has venture capital firms feeling a sense of déjà vu.

A perfect storm of decreasing institutional investment, increasing venture investment in tech companies, and deteriorating IPO market

venture-backed IPO


conditions looks ominously dour for venture –backed deals and future venture funding.  Mark Heesen, president of the National Venture Capital Association (NVCA) recently surmised, “For the past three years, the venture capital industry has been investing significantly more dollars into companies than it has been raising from institutional investors.”  He points to the current dearth of exit opportunities as the biggest potential problem for venture capital firms sitting on big portfolios that need to attract more funding in the future.  Investors are growing increasingly wary of the market and when the IPO spigot turns to a trickle, they are likely to wait until conditions improve.

In any normal year, the expanding IPO pipeline would be good news and viewed as a positive sign by investors. Nearly 200 companies sit in the pipeline, but the market volatility of the last couple of months has frayed the edges of investor sentiment which has several of the bigger deals reconsidering the timing of their IPO.  Many of the companies are tech-related and the tech sector has been particularly volatile in the August and September declines.  The stocks of recent IPOs, such as LinkedIn, have been rocked much harder than the sector generating some angst among investors and venture firms considering near term issues.

Highly anticipated IPOs from Groupon, Yelp, and Zynga may be put on hold.  Venture-backers must be sea-sick after watching the market capitalization of LinkedIn ride a wave of extreme highs and lows in just the six months following its IPO. As a group, recent tech IPOs are down for the year. And as investor nervousness mounts in the current stock market environment, the prospect of sustained support for new IPOs is diminishing.  It doesn’t help that some of the pipeline companies are struggling in the current economic environment with some having to scale back earnings projections.

For the venture capital industry, the negative impact of delayed IPOs could prove to be severe, but not necessarily devastating.  Venture funds may need to find alternative ways to exit their deals, or they are may see institutional investment dry-up.  If they force an IPO at the wrong time, it could sour investors even further.  It’s damned if you do, damned if you don’t, but this could change fairly quickly should market conditions improve significantly.


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