VENTURESCOPE(2)

Venture capitalists are usually a pretty optimistic bunch. After all, that's the nature of the business they're in. So when many VCs expressed continued pessimism about US IPOs in last month's National Venture Capital Association (NVCA) year-end survey, the dawning of 2007 didn't appear to be a cause for celebration. Almost half of the VCs surveyed predicted that the US IPO market would remain sluggish, while only three percent expected a strong recovery in the year ahead.

However these VCs may be guilty of unnecessary defeatism. Fourth quarter results released this month show that 2006 in fact saw the largest amount of money raised from venture-backed US IPOs since 2004. In terms of the average amount raised in an IPO, 2006 ranks as the third-strongest in the past six years. A total of 58 venture-backed flotations raised $5.3 billion (€4.1 billion) last year, according to an exit poll by Thomson Financial and the NVCA.

The fourth quarter was no small contributor to this dollar amount, with 21 IPOs completed raising $1.8 billion according to the poll. M&A exits, meanwhile, were slightly down during the quarter.

Mark Heesen, president of the NVCA, says the numbers show that a number of promising companies are now reaching a point where they can float with some confidence.

I think there are many companies that could have gone public over the last year that instead took an easier way out and were acquired

Mark Heesen

“I'm more optimistic than most VCs,” says Heesen. “When I look at the number of companies in registration, that's a more solid number than in other years. We're at the point now where companies that were funded by the bubble, this is the time for them to actually go public. And there are some very good companies that are on the verge.”

Healthcare IPOs were the most commonplace last year, with 28 completed raising $1.36 billion according to the Quarterly Liquidity Report from Dow Jones VentureOne. But IT companies also performed well on the stock markets, with 20 IPOs raising $1.95 billion. This was a significant increase over the 11 technology IPOs that raised just $682.6 million in 2005. In fact, 2006 saw the most IT IPOs in the US since 2000.

Globally, IPOs in 2006 raised the largest amount of any year in history, according to new data from Ernst & Young. A total of $227 billion was raised through global IPOs from January to November last year, with the Hong Kong Stock Exchange leading the pack in terms of money raised.

Although Heesen says there are good signs for US IPO performance in 2007, he cautions that many US VCs are still looking at M&A and IPOs in overseas markets as the better exit options. He adds that Sarbanes-Oxley reform may ultimately be necessary to see a true recovery in the US IPO market.

“Sarbanes-Oxley reform would show that the US IPO market is again an attractive place to exit a company as  opposed to helping your entrepreneur get your company acquired,” he says. “I think there are many  companies that could have gone public over the last year that instead took an easier way out and were  acquired. That’s unfortunate, because while you’ll get good returns on an acquisition, you’ll never get  Google-like returns.”