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Little Hope for Battered IPO Market

When the IPO window clattered shut this spring, most VCs predicted a temporary offering hiatus as markets endured a rough patch of credit crunch-induced volatility.

Three quarters, minus 5,000 or so Dow points, and too many bank failures and bailouts to count later, investors now believe it will take much longer—per more than a year—for new offering demand to recover. Accordingly, they’ve been pulling planned offerings, and putting off new filings. No venture-backed companies filed to go public in November, and none made a market debut. Early December was equally bleak.

“The market volatility isn’t going to change anytime soon,” says Peter Falvey, co-founder of Revolution Partners, a Boston boutique investment bank acquired in December by Morgan Keegan. Falvey says his best guess is that the window for public offerings will open up sometime in 2010—and even then he’s predicting that the bar for new offerings will be higher than in the past.

Given that shares of recently public small-cap companies have posted particularly poor aftermarket performance lately, Falvey says it would be wise for future IPO candidates to aim bigger. He recommends that companies exploring a public offering plan to move forward only if it’s likely they can generate a market cap of $500 million or more. That generally requires annual revenue of $100 million to $200 million and either profitability a clear path into the black.

Others are looking to bolster IPO demand by bringing in long-term investors for both late stage private rounds and public offerings. InsideVenture, a group backed by several venture firms and asset managers, is currently collecting nominations of private companies that are ready or near-ready to go public.

The market volatility isn’t going to change anytime soon.

Peter Falvey

InsideVenture, based in Menlo Park, Calif., is planning a March conference in which executives of selected late stage companies will present their businesses to asset managers. Mona DeFrawi, the group’s CEO, says she’s hoping the effort will stimulate demand for IPO shares among investors who favor a buy-and-hold strategy, thus helping to reduce volatility for newly public companies in aftermarket trading.

For now, however, the IPO pipeline is looking dry. This past year was one of the worst on record for public market exits, with only six IPOs backed by venture capital firms. The last company to go public, as of early December, was Grand Canyon Education, an online education provider backed by private equity fund Endeavor Capital.

Meanwhile, withdrawals from VC-backed companies continue to mount. November had plenty, including Acclarent, a developer of surgical devices for treating ear, nose and throat ailments, BlueArc, a provider of network storage systems, and Local Matters, a provider of local search solutions.

It is important to note that the new issues market has been dismal for all companies, not just those with venture backing. Globally, the volume of IPOs in the first 11 months of 2008 was the lowest number on record since 1995, according to Ernst & Young.

A total of 745 IPOs raised $95.3 billion worldwide as of Nov. 30, compared to 1,790 IPOs that raised $256.9 billion in the same period in 2007, E&Y reports. The last time the worldwide IPO market was that moribund was 1995, when a total of 374 IPOs raised $52.4 billion from Jan. 1 to Nov. 30, according to E&Y.