Cautious Venture Capitalists Delay IPOs
Oct. 4, 2005--Tech companies led a third-quarter surge in venture-backed initial public offerings, but insiders say market pressures are holding many others back.
On Monday, the National Venture Capital Association said the third quarter of 2005 saw 19 venture-backed companies issued stock for the first time, collecting almost $1.5 billion from investors. This tops the first two quarters of the year which saw only 10 venture-backed IPOs apiece. But the strong showing remains below 2004's quarterly average of 23 IPOs. Observers say various factors such as longer product development cycles, the presence of acquisitive and powerful incumbents, and the pressure of answering to shareholders may be forcing companies to solicit buyers or seek another round of venture capital.
"Many companies are in a position to delay going public, and avoid having to show profits immediately," said Kirk Walden, PricewaterhouseCoopers' director of venture capital research.
Walden pointed to Vonage, which received an additional $200 million in venture capital in the second quarter instead of going public. "They want to spend that money in big chunks to advertise and expand their customer base in ways they wouldn't be able to if they had to answer to investors."
In the second quarter, Jazz Pharmaceuticals and Caspian Networks also secured additional venture investments of $100 million and $55 million, respectively.
Walden said the longer product cycles force life sciences and biotech firms to stave off issuing stock until they are ready to bring a drug or medical device to market, and are reasonably assured of regulatory approval.
For software developers, large incumbents like Microsoft and Oracle can scare off potential IPO investors, Walden added. These large companies often use their own stocks for acquisitions. Investors, however, prefer cash, and may therefore shy away from taking part in IPOs of companies that are likely takeover candidates. "It's a really tough IPO market for software companies," said Walden. "This may have deflated the number of IPOs last quarter."
Mark Heesen, president of the National Venture Capital Association, said that investors are allowing companies to look beyond quarterly earnings and invest in longer-term growth. Many, however, are finding lackluster research and development pipelines, and turning to acquisitions for new technology and product ideas.
The largest third-quarter acquisition came when telecom equipment maker Juniper Networks paid $337 million in cash and stock for Peribit Networks. Peribit's software can improve the performance and speed of Juniper's wide area networking gear.
Overall, venture-backed acquisitions this quarter outnumbered IPOs by four to one, and are on par with the rolling average of 78 per quarter since the beginning of 2003.
"From a long-term economic perspective, it's not good for the entrepreneurial spirit if all venture-backed companies get acquired," said Heesen. "That's hard to put down on paper, but the reality is that entrepreneurs consider the gold ring an IPO, not an acquisition."