Getting Ready for an IPO Window: Venture Capital in the Northeast

9/22/11

An overriding story of the past several years has undoubtedly been the global economic volatility. Conditions in the stock markets have been unpredictable and therefore many venture capital firms have felt the need to reserve more capital for existing investments, postpone new investments and, in some cases, postpone raising new funds. While a number of firms adapted to the challenges by supporting many of their companies with additional investment rounds, the challenge to raise new funds, even smaller funds, still appears to be present.

According to a recent global study Deloitte LLP did with the National Venture Capital Association about the state of the global initial public offering market, VCs appear to be very concerned about the lackluster IPO market and the potential for IPOs in the future. Many VCs believe that without the higher returns generated by IPOs, the exit opportunities offered by M&A alone are not compelling enough to draw limited partner interest over the long term.

Other trends that stood out from this survey include:

• VCs feel the pinch from low IPO activity: More than 80 percent of venture capitalists surveyed felt the current IPO level of activity was too low to support a healthy VC industry. Many believe the higher returns generated by IPOs are important to providing superior returns to LPs and growth capital necessary to developing portfolio companies.

• U.S. exchanges are viewed as most promising for venture-backed IPOs: 87 percent of global respondents selected the NASDAQ as one of the three most promising stock exchanges for venture-backed IPOs. The New York Stock Exchange was the next most promising with 39 percent.

• Lack of key drivers a cause of light activity: 83 percent of all respondents indicated there needed to be a stronger investor appetite for equity in public companies in order to create a healthy and vibrant IPO market. Fifty-two percent also cited the need for a stable economic environment. In the U.S., 30 percent of respondents indicated a need for a competitive investment banking community for IPOs.

• Despite challenges, there is still great promise abroad: Of those who are investing outside their home countries, more than half (57 percent) plan to increase this activity during the next five years. An additional 35 percent plan to maintain their level of foreign investment.

• Tech scores big with VCs: Approximately 69 percent of respondents cited an anticipated increase in investment in cloud computing over the next five years, while 65 percent plan to increase investment in social and new media. Clean technology remains attractive with 62 percent of respondents planning to increase investments in this area as well.

How is this relevant to the Northeast region, you might ask? IPO activity at the first half of this year in the Northeast didn’t appear to be able to support a healthy VC industry. The tide appears to be shifting though to a more positive environment since these results were launched, with LinkedIn possibly initiating a domino effect to create resurgence in IPO filings.

While it might be expensive to start a company in the Northeast, there is a vast talent pool experienced in new media, advertising and retail that likely makes investors stop to take a look at one of the top media and fashion capitals of the world.

There appears to be a shift in the IPO market that may contribute to the VC and startup community becoming invigorated. According to the survey, the average age of companies that have gone public in the U.S. in 2011 is 10.2 years, compared to 2001 when the average age was 6.5 years. As a result, there may be a backlog of more mature companies waiting to go public, which could contribute to the IPO market rejuvenation

While the time to file an IPO may be somewhat uncertain in the coming months, many VCs and financial advisors are helping private companies understand and become prepared for what it takes to go public.

While some technology-focused IPOs popped up this spring and summer, other startup companies looking to go public may now be in a holding pattern and want to be prepared when the market is less volatile. By focusing on planning now, startups could take advantage of a solid market and strong valuation when the IPO window reopens.

Yet, the question remains, will there be enough market stability in the next year to create a healthy ecosystem for the venture industry?

Mark Davis is managing partner for Deloitte & Touche LLP in Jericho, NY and leads Deloitte & Touche LLP’s tri-state venture-backed growth practice. Steve Ingram is a partner and the New England Tech-Venture Center venture capital practice leader at Deloitte & Touche LLP in Waltham, MA. Follow @

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