First-Quarter Drop in IPO Exits Could Spell Trouble for Venture Capitalists


Last year was a great one for venture capital. Mega amounts raised by startups and venture firms were supported by the large returns clocked by the industry via initial public offerings and mergers and acquisitions.

But the first quarter of this year changed the dynamic, according to data from Renaissance Capital, an IPO research and investment-management firm. While venture investments appear to be barreling ahead, venture exits via IPOs dropped.

The first quarter of 2015 was the worst in two years in terms of the number of venture exits via IPOs, as well as the amount of IPO proceeds that venture-capital backed companies raised, Renaissance said.

Just 17 venture-backed companies went public in the U.S. in Q1, down from 40 a year ago. IPO proceeds dropped 59% to $1.3 billion in the first quarter from $3.2 billion a year ago. The first quarter IPO were also lower than the fourth quarter of 2014, when 30 venture-backed companies raised $4.4 billion.

Total exits for venture-backed startups, including mergers and acquisitions, in North America also dropped in the first quarter to 181 deals totaling $4.91 billion from 255 deals totaling $14.07 billion in value in the year-ago quarter, according to PitchBook Data Inc. That is a 65% decline in dollar value.

By contrast, global venture activity in the first quarter was the highest on record by dollars invested, according to research firm Preqin. Global venture investments in startups jumped to $27.4 billion, up from $18.1 billion in the year-ago quarter. Eighteen private companies raised rounds at a valuation of a billion dollars or more since the start of the year, according to data from The Wall Street Journal and Dow Jones VentureSource.

U.S. startups raised $16.3 billion in the first quarter, the highest level in the past five years, according to Preqin. Dollar totals increased 35% from the year-ago quarter, when U.S. companies raised $12.06 billion. The funding level was also about double the quarterly amounts five years ago. Although the amount invested jumped, the number of venture investments declined in the first quarter of this year, to 887 deals from 1,285 a year ago, according to Preqin.

The slowdown in IPOs could indicate an imminent problem for venture capital investors that have accumulated large portfolios, invested a lot of capital, and might not be able to push their startups out through IPOs to get a return.

“The data shows, though, that the current investment levels aren’t yet justified by the exit environment,” Tomasz Tunguz, a partner at Redpoint Ventures, wrote in a blog post on Wednesday. Mr. Tungusz was looking at the IPOs through 2014 in his analysis, not taking into account the decline in the first quarter of this year.

Mr. Tunguz estimated that the industry would need two times the number of IPOs in its biggest year of 2000 to accommodate the exits of just those IT companies that raised growth rounds of $40 million or more in 2014.

But Scott Kupor, a managing partner at venture firm Andreessen Horowitz, said in a tweet in response to the Renaissance Capital IPO data: “tech money [is] shifting from public markets to private markets.”

His point was that many of the investors in late-stage private companies, the ones that have driven venture capital investment totals up in 2014, are firms that have long invested into IPOs. Some contend that these firms, including mutual fund and hedge funds, are keeping these companies private by providing them with later-stage financing instead of pushing them into the public markets.

“The ease with which you can get capital takes away one of the reasons you might want to go public,” said Bill Gurley, a general partner at Benchmark. He said that Benchmark’s two portfolio companies Hortonworks Inc. and New Relic Inc., which went public last year, could have easily remained private and raised late-stage capital.

Some supporters of the idea that companies should stay private longer believe that they would be able to go public when necessary, because their backers would support IPOs once the companies are ready.

This argument is somewhat undermined by the fact that several of the recent IPO attempts were less than stellar. Box Inc., for example, priced its January IPO below the level of its most recent private round and is still trading below that level.

“If they postpone [an IPO] it will be imperative that they are finding a path to profitability,” Mr. Gurley said. He said he can easily imagine a scenario where a company forgoes an IPO and then sees slowing growth, and, whether it was a billion-dollar private company or not, disappears.

Mr. Gurley said he isn’t worried about the IPO window closing. “I haven’t seen anything [to suggest] that the IPO market is not hyper-healthy,” he said. He pointed to Wednesday’s GoDaddy Inc. IPO, and the planned IPO for Etsy Inc. In the first quarter, 82% of all venture exits via IPOs were in health care, according to Renaissance Capital.

In terms of performance, the average IPO traded up 15% during the first quarter, according to Renaissance Capital. But more than 30% of all IPOs in the past two quarters traded down on opening day, “which could impact issuance if it continues,” Renaissance said.

There are some signs that the slow pace of new issuances would continue past the first quarter.

The number of all types of companies, including non-venture-backed ones, that publicly registered for the first time for an IPO in the first quarter was down about 50%, to 47 companies, from 98 in the year-ago quarter, according to Renaissance Capital. Of the companies currently in IPO registration with up-to-date filings, there are just five technology companies and three consumer ones, the firm said.

Write to Yuliya Chernova at Follow her on Twitter at @ychernova