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Commentary

Financial Crisis: Venture Capital Drying Up

In the third quarter of 2008 there was one venture-backed IPO. One. In the entire quarter! That the increasingly tight credit market was making it harder to maintain operations was already keeping many business owners awake at night, but now it appears that a key source of funding for startup companies has morphed into a mirage -- or has it?
In the third quarter of 2008 there was one venture-backed IPO. One. In the entire quarter! That the increasingly tight credit market was making it harder to maintain operations was already keeping many business owners awake at night, but now it appears that a key source of funding for startup companies has morphed into a mirage -- or has it?At the rate of one IPO per quarter, the incentive to be a venture capitalist starts to look like playing the lottery or holding out for an NFL head coaching position -- John Doerr, Tim Draper, and the other heavy hitters on Sand Hill Road (and elsewhere) didn't make their bones betting on four opportunities per year. This is not prime time for a funding road show.

Not only did the report from Thomson Reuters and the National Venture Capital Association (NVCA) find that there was a single IPO in Q3, the year-to-date total is a paltry six. Mark Heesen, president of the NVCA said:

"The crisis in the financial markets has further exacerbated an already troubling situation in that most venture-backed companies are postponing or abandoning an IPO exit for the foreseeable future. Additionally, the lower M&A transaction volume can be attributed to the expected uneasiness of large corporations who are exercising more caution in their acquisition strategies of venture-backed companies until market conditions become more auspicious."

Piling onto the low-watermark report is another analysis from PriceWaterhouseCoopers finding that the VC-backed IPO market hasn't been this bad since 1978. Without the substantial carrot of an IPO payday dangling, it stands to reason that VCs would retreat from investing, but the evidence (or at least the PriceWaterhouseCoopers report) indicates otherwise. VC investment in 2008 is up approximately $62 million from 2007, which may indicate that VCs are holding their collective breath (who isn't right now) and waiting for more favorable -- or at least predictable -- market conditions.

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