Good news: IPOs have slowed
Venture capitalists aren't getting as many tech IPOs to market as they'd like to – and that should be a relief for investors.
NEW YORK (FORTUNE) - Only three venture-capital-backed technology companies succeeded in going public during the first quarter, and the National Venture Capital Association is not happy about this state of affairs.
Indeed, NVCA president Mark Heesen recently issued a statement to convey the "unease" he was feeling about this dire situation.
The lack of IPOs, it seems, is threatening the U.S. economy. "We are becoming increasingly concerned about the economic implications of the lackluster IPO market for venture-backed companies," Heesen said.
"Although we are bolstered by the continued strength of the acquisitions market, we cannot rely on it as the only avenue to produce above-average returns for the venture industry. Our economy depends on a strong U.S. capital markets system to create jobs and revenues here." (emphasis added.)
The only way to react to such a bold statement is to call it what it is: Balderdash. You see, it's more likely that the lack of IPOs is good for the country.
Fewer IPOs make for a stronger market
The dearth of new offerings actually means that fewer low-quality companies will come to market, which means that fewer investors will get burned investing in substandard companies, which means that fewer people's next-door neighbors and cousins will lose their shirts in the stock market.
Fewer IPOs, by the way, doesn't mean the capital markets are not functioning. They're working just fine, unless you happen to be an immature startup that's not yet ready for prime time.
That's not how the venture-capital industry sees things, of course. It sees a threat to its member's abilities to "produce above average returns." Who cares? Average investors should be delighted that only quality companies like Google (Research) or Salesforce.com (Research) or even map-navigation firm Navteq can go public these days.
The economy, as everyone knows, actually is doing quite nicely, thank you, despite the high price of oil, despite rising interest rates, despite a jittery housing market and, yes, despite the fact that VCs are having a tough time doing IPOs.
What's happening with IPOs is simply a return to equilibrium. Just 26 technology companies pulled off the trick in 2005, accounting for 4% of all IPOs and raising $2.6 billion, according to Thomson Venture Economics (which supplies the NVCA's data). That's way down from 1999, when there were 248 tech IPOs that accounted for 42% of all U.S. IPO activity and raised $19.3 billion.
This is a good thing. It shows that institutional investors - the ones who tell the bankers whether or not they'll buy an IPO - are showing restraint.
There will be tech IPOs again. It's just that they're going to have to be credible, profitable, sizeable companies.