The current level of IPO activity is too low to sustain the venture capital industry—say venture capitalists the world over.
More than 80 percent of the 347 VC’s surveyed for the 2011 Global Venture Capital Survey said current IPO activity levels in their home countries aren’t sufficient to support the health of the market. In the United States, an overwhelming 87 percent of U.S. venture capitalists surveyed believe that the current level of IPO activity is too low.
“That’s a huge consensus for venture capitalists, said Mark Jensen, national managing partner for venture capital services at Deloitte & Touche LLP, which co-sponsored the survey along with the National Venture Capital Association. “You can’t get these guys to agree on a turkey sandwich for lunch.”
The global survey is a snapshot of the perceptions and opinions of venture capitalists from nine countries, and reflects feelings more than actual figures. And the snapshot comes with one large caveat. The questions were distributed to VC’s back in the spring, before the recent spate of high-profile social media IPOs and media speculation about possible tech bubbles. Meanwhile, all indications point to 2011 being a decent year for going public. There have been 75 IPO’s in the U.S. this year— that’s a 27 percent increase over last June. And the technology sector has seen 29 companies go public this year. That’s more than any other sector, according to data from Renaissance Capital.
Not surprisingly, in the U.S., where there has been an active VC and entrepreneurial community for many years, 91 percent of venture capitalists deemed the domestic IPO market to be a critical element of the venture capital industry. Yet, in contrast to the global trend, only 36 percent of domestic venture capitalists said that IPO markets in other countries were essential to the success of the U.S. industry.
Meanwhile, the vast majority of venture capitalists in all nine countries surveyed still look to the U.S. exchanges to provide a healthy and vibrant market. Globally, 87 percent of respondents selected NASDAQ as one of the three most promising stock exchanges for venture-backed IPOs; 39 percent selected the New York Stock Exchange (NYSE), and 33 percent cited the Shanghai Stock Exchange.
Overall, VC’s in different parts of the world attributed the slowdown in IPO activity to several key drivers, from the lack of a competitive investment banking community (50 percent in Germany) to a lack of freely available capital (43 percent in the UK). But 83 percent of all VC’s pegged the biggest culprit as the lack of ”appetite for equity in public companies.”
Jensen attributes this belief to the investment preferences behind large pension funds and endowments.
“They don’t want to invest $ 50 million in a $ 300 million company. They want to put $ 300 million in a $ 5 billion company. Those are difficult investments to come by. It’s the smaller $ 200 million to $ 300 million IPO’s that are disappearing. And these are the concerns that are being reflected in the survey results,” he said.
Meanwhile, a handful high-profile IPOs in social media could blur a larger problem, Jensen said.
“It’s equally important that these smaller companies are able to go. We start to run the risk of saying ‘gee we are starting to turn the corner’. But you have to take another look at it. There are whole bunch of companies in other industries that no one is paying attention to. These companies without an ability to go public are stranded and wind up being acquired. In then, technologies gets swallowed up and the founders move on. Those are the fears.”
Photo Courtesy of Flickr’s Rob Lee.
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