The Worst IPO Market on Record?

The first half of 2008 was dismal for venture-backed initial public offerings, and most VCs don't see the climate improving any time soon

By Spencer E. Ante

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When M. Benjamin Howe headed up technology investment banking for Montgomery Securities in the mid-1990s, the market for initial public offerings was a fountain of profit. In 1996 alone, Howe and other bankers helped take public 270 companies that were financed by venture capitalists. With so much deal flow, it was a wonderful time to be a boutique investment bank like Montgomery, which made a fortune catering to the high-tech set. "We all used to chase the IPO," says Howe.

Today, Howe and other bankers are shunning such deals. To begin with, there are so few IPOs these days. And with all the consolidation in the investment banking business, Howe says that leaves the boutique banks with nothing more than table scraps to split among themselves. At Montgomery, Howe used to get 40% of the shares of a deal as a co-manager; today he says three to five co-managers are splitting 20% of a deal's offering. As the head of a new boutique investment bank, Americas Growth Capital, Howe doesn't even bother to focus on drumming up IPO business. "The economics are so crappy," he says. "It is not even a business strategy for a boutique investment bank."

It'll Be a Rough Year

The market for initial public offerings is on ice. In the second quarter of 2008, there were no IPOs for companies with venture capital financing, according to the National Venture Capital Assn. (NVCA). That's the first time a quarter has passed without an initial public offering since 1978. This dismal performance follows an unusually slow first quarter during which only five venture-backed companies went public. The situation is so dire that representatives from the NVCA are making a press tour and calling it a "capital market crisis" for the startup community. "It will be the worst year in IPO volume in 20 years," predicts Howe.

It's unclear, of course, how 2008 will turn out. The lowest number of venture-backed IPOs since the NVCA started keeping statistics in 1991 came in 2002, when 22 such companies went public. If the second half of 2008 matches the first half, there will be only 10 venture IPOs, or less than half the total of 2002. There may not even be that many: Some 81% of venture capitalists do not see the IPO window opening until next year, according to an NVCA survey of 660 financiers.

Such a crisis, they claim, could have terrible consequences for the U.S. economy. If the current IPO drought continues, venture capitalists fear fewer new companies will get funded. More venture capital firms are likely to go out of business. And without more new businesses, that could crimp the creation of high-paying jobs that are typically generated by the venture-backed startups. "We want to continue to be that engine of growth," says NVCA President Mark Heesen. "It is a very serious issue."

Subdued Interest

It's not only changes in the investment banking world that are hitting the IPO market. The weak economy and poor stock market have also dampened interest in IPOs, say VCs, bankers, and investors. Many parts of the technology industry have matured, making it more difficult to remain independent. There seems to be less interest among entrepreneurs as well for tapping the public markets.