Why venture capitalists are jittery

Internet IPOs last year reached highs not seen since the dot-com boom, but that still wasn't enough to make venture capitalists confident about 2012.

By The Fiscal Times Jan 4, 2012 11:45AM
Image Source/Getty ImagesBy Suzanne McGee, The Fiscal Times

Last year was a bonanza for Internet startups trying to go public. Global Internet IPOs raised $9.3 billion in 2011, almost double the 2010 level, according to figures released by tracking firm Dealogic.

But while that’s higher than in any year since the dot-com boom went bust more than a decade ago -- and while one of the deals packing the most buzz, online gaming giant Zynga (ZNGA),  was a highlight of the fourth quarter -- IPO activity in the closing months of the year wasn’t lively enough to give the venture capital backers of those companies still languishing in the pipeline much cause for jubilation.

At least that’s how the National Venture Capital Association sees the world. "The venture-backed IPO market still has a considerable way to go on the road to recovery," says NVCA President Mark Heesen. "The bottom line is that we need at least double the offerings that we saw in 2011 to declare the market back on track."

And that won’t be easy, at least not until global financial markets settle down and volatility diminishes significantly. That’s a prerequisite for jittery investors to calm down enough to take a risk on a startup company; after all, there’s a reason why safe havens like gold and fixed-income securities fared so much better than most other asset classes for much of 2011. Sure, a giant global brand name like Facebook -- a company that played a role in felling Middle Eastern political regimes last year -- won’t have much trouble tapping the IPO markets, but the jury is out on lesser-known companies.

A total of 60 venture-backed companies are waiting in the wings, having already filed their S-1 forms with the Securities & Exchange Commission -- a first step toward an IPO. Tuesday’s big jump in the Dow, the S&P 500 and other major market indexes may seem to augur well, but the shadow of the European sovereign debt crisis continues to hang over the stock market. All that stands between a great IPO and a debacle is a single ill-timed piece of news from the European Central Bank, German politicians or other players in the almost operatic spectacle that is the slow-motion collapse of the eurozone of old.

There is some good news for venture capitalists, however. Those companies that did make it to market in the fourth quarter ended the year trading 16.8% above their offering price; only three companies are trading below their IPO price. These days, getting investors to focus on a single company’s fundamentals rather than on the risks associated with stocks as an asset class should be considered a victory in its own right.

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