The Great Recession has caused a virtual drought of tech-based IPOs, leading to a steep plunge in venture capital (VC) funding.
According to Bloomberg, VC investing decreased sharply in 2010, with the number of active firms dropping 47 percent in the first half from last year.
Concurrently, the number of US VC firms making at least one investment per quarter fell to a paltry 167 from a more respectable 313 in 2009.
Bryan Pearce, Americas director at Ernst & Young, told Bloomberg that the decline in IPOs has significantly contributed to deteriorating returns at VC companies, making it even more difficult for them to raise fresh funds.
“This creates a class of ‘walking dead’ firms that are only working with their existing portfolio companies and don’t have the cash to make new investments,” Pearce explained.
“It’s [certainly] going to be harder for startups to raise money because there are fewer places to go. [So], for the struggling firms, it’s a slow and painful death.”
As expected, almost 64 percent of venture capitalists, entrepreneurs and technology executives don’t expect IPOs to return to where they were in the late 1990s and early 2000.
Nevertheless, the pace of IPOs seem to have picked up slightly in 2010, with 40 VC-backed companies successfully going public during the first three quarters.
“[Still], if there is a long-term expectation that the IPO market will not rebound, that means a reduction in the number of dramatic home runs for VC investors and lower overall returns,” Peter Astiz, DLA Piper’s global co-head of technology, confirmed in a recently published report.
“Fewer IPOs also means fewer small- and medium-size public technology companies, which traditionally have been the acquirers from many of the technology company exits.”