Mumbai: Venture capital firms are finding it increasingly difficult to tap market funds for initial public offers and merger deals, making exit strategies difficult. No venture-backed firm had entered the market with an initial public offer in the second quarter of 2008, according to reports.
The start-up community is in a capital-markets crisis, the first time in three years, as no venture-backed company went public in the second quarter, the National Venture Capital Association said.
Two-thirds of VCs covered by a recent industry survey also pointed out their portfolio companies are less likely to want to enter the public markets today than they were three years ago, it said.
The market for venture-backed IPOs have plummeted from 43 in the first quarter of last year to just five in the current year quarter, the slowest pace since 2003, and few investors expect a rebound as economic growth tapers off and loan losses mount, the report by Dow Jones VentureSource said.
By end-June, 333 companies had gone public globally, raising $73.2 billion, 41 per cent lower than the amount raised by 702 firms a year ago, according to data and the lowest since 2005.
With the credit crunch weighing heavily on the investors, US venture capital funds also failed to make it to the IPO market for the first time since 1978. The slowdown in IPOs has also cut underwriting fees by almost 50 per cent, reports said.
As of 30 June, only 42 venture-backed companies had filed IPO papers with the Securities and Exchange Commission, down 40 per cent from 72 companies in the third quarter of last year.
Moreover, the slowing of the US economy has limited the appetites of companies for larger merger deals. Venture capitalists have now fewer options for selling out of their investments through mergers and acquisitions.
VentureSource reported 56 venture-backed deals in the M&A segment during the second quarter compared with 97 such deals in the same period last year.
The companies managed to secure healthy prices despite the drop in the number of deals. The median price paid for a venture-backed company in the second quarter was $87.6 million – up nearly 57 per cent from the same period last year, the report said.
But it also took venture capitalists an average seven years to cash in on the M&A and steer companies to the IPO market.
The University of San Francisco's Silicon Valley Venture Capitalist Confidence Index continued plunging in this year's first quarter. The index fell to 3.22 on a scale of 5 against last year's fourth quarter drop to 3.54 from 4.14 the same quarter the previous year.