Venture-backed IPO drought worst in 30 years

By Anupreeta Das

SAN FRANCISCO (Reuters) - U.S. venture capitalists blame hibernating credit markets and skittish investors with no appetite for new stocks for a venture-backed IPO drought unlike any seen in the past three decades, according to a new survey.

Not one venture-capital-backed U.S. company made an initial public offering in the second quarter, the National Venture Capital Association found. The last time a quarter went by without a public debut by a VC-backed company was in 1978.

The NVCA, which represents nearly 500 U.S. venture capitalists, has called the current situation a "capital markets crisis" for the start-up community.

There were only five VC-backed IPOs in the first quarter. Last year, there were 86 such IPOs between January and June.

"Flash forward and see venture capitalists, who by their nature are optimists, saying they don't see the IPO market opening in the next six months, you see an extremely serious situation," NVCA President Mark Heesen said in an interview.

In the NVCA survey of 662 venture capitalists, 43 percent said it would take at least 12 months for the markets to become more welcoming. Another 32 percent said it would take up to two years.

Venture capitalists fund start-up companies, aiming to make several times their initial investment when they eventually go public or get sold. Web companies that are now household names, such as Google Inc (GOOG.O), Amazon.com Inc (AMZN.O) and Yahoo Inc (YHOO.O), were all once start-ups, and gave their venture capital backers outsized returns when they went public.

The median age for a VC-backed company when it goes public is nearly nine years. But now, venture capitalists may have to keep these companies for even longer and therefore have less time and resources to invest in new start-ups, Heesen said.

Venture capitalists choosing to shop their start-ups to more established rivals are also hurting this year, the NVCA found. Compared with the first half of 2007, when 355 start-ups were sold, only 120 companies have been sold in 2008.

When the markets are healthy, an acquiring company is more likely to pay handsomely for a start-up that could otherwise have gone public and presented a threat, Sanjay Subhedar, a general partner at Storm Ventures, said in a recent interview.

But "M&A values get depressed if there is no IPO alternative," he said. As most venture capitalists do not want to sell start-ups at prices they consider inadequate, there are bound to be fewer acquisitions with the IPO market crippled, he said.

(Editing by Braden Reddall)