Venture Capital Ill Due to Low IPO Activity

Michelle Remo, “Big 4″ observer
June 23, 2011 /

The current level of IPO activity around the world is too low to support the health of the venture capital industry according to respondents to Deloitte 2011 Global Venture Capital Survey.

The survey, co-sponsored by the National Venture Capital Association, showed that more than 80 percent of venture capitalists from across USA, China, Brazil, India, France, UK, Canada, Germany and Israel, believe the IPO activity of their respective countries is too low.

On the other hand, a considerable number of respondents showed interests in cloud computing (69 percent), healthcare services and clean technology innovation (62 percent) globally.

In China and India for example, investors are interested in both biopharmaceuticals and healthcare services.

The survey revealed that venture capitalists see high returns generated by IPOs as a critical factor in providing superior returns to limited partners and growth capital to developing portfolio companies, Deloitte found.

“Clearly the industry continues to feel the ripple effects of the global economic downturn — most notably in the form of limited exit opportunities,” said Mark Jensen, Deloitte national managing partner for venture capital services.

“However, with signs of improvement in the economy and easing of the liquidity crisis, the tide may be turning. Innovation continues to be an important driver in our economic health and a strong exit marketplace is critical to the venture capital ecosystem driving much of that innovation.”

“Not only have millions of jobs been created, but superior returns have been delivered to pension beneficiaries, endowments and charitable foundations for decades,” added Mark Heesen, president of the National Venture Capital Association.

“Entire industries have been formed, pushing innovation forward and changing the way we live and work for the better. The recovery of the IPO market, both here in the U.S. and abroad, is not a nicety but a necessity for the future health of the global economy.”

Deloitte attributed the low IPO activity to a lack of several key drivers that are necessary for a vibrant capital markets system.

Around 83 percent of venture capitalists surveyed believe that the most important factors is a strong investor appetite for equity in public companies, 52 percent cited the need for a stable economic environment, while 32 percent pinpointed the need for more adequate stock analyst coverage.

In USA, 30 percent of venture capitalists believed that a competitive investment banking community is needed for IPOs, while 33 percent cited easier reporting for newly public companies.

“There is no doubt that the limited IPO market impacts investors and limited partners, but it’s important to remember that it affects entrepreneurs as well,” said Scott Tobin of Battery Ventures GP and head of the firm’s Israel office.

“When I talk to these folks, whether in the U.S., Israel or anywhere in the world, they dream of solving big problems and building long-lasting public companies that survive beyond their tenure as CEO. You need a healthy IPO ecosystem to encourage that innovation and ensure that these incredibly smart and talented individuals truly reach for the stars,” Tobin said.

The survey further found that 57 percent of of those who invest outside their home countries plan to increase their IPO activity over the next five years and an additional 35 percent plan to maintain their level of investment.

“Some of the companies with the strongest potential to become profitable global leaders have a multinational focus from the beginning – leveraging R&D in Israel, manufacturing in China, services in India and partnerships in the U.S. — and this is driving investors to increase their global coverage,” said Deepak Kamra, general partner of Canaan Partners.

 

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