Slim Pickings For VCs in 2002

January 3, 2003 ( - Just 22 venture-backed companies had initial public offerings (IPO) last year, raising a paltry $1.9 billion, according to a Dow Jones report.

That was down from $2.9 billion from 35 IPOs in 2001, and well short of the $21.1 billion, 226 IPOs seen in 2000, according to data from  Thomson Venture Economics and National Venture Capital Association (NVCA).

However, the slim IPO market in 2002 turned out more quality than quantity when compared to recent years.  Of the four venture-backed IPOs in the fourth quarter, three were trading above their offering price as of December 31. This evidence points to venture capitalists only able to bring their strongest start-ups to the market, according to the report.

In stark contrast, 1999 and 2000 saw less than 10% of the venture-backed companies brought to the market turn a profit.   The Thomson and NVCA data said that standard applied to 40% or 50% of the 2002 IPOs.

Additionally, 2002 saw a more diverse mix of venture-back companies entering the market including start-ups in e-commerce, food and beverage services, medical software, and health care services.   Health care in fact raised the largest amount by any particular sector in the year, with $355.7 million on the back of three IPOs last year.

Tech Ticks

Turning to quantity however, the perennial favorite target, software start-up companies, was again tops in 2002, with five venture-backed IPOs raising $217.8 million.   But venture-backed start-ups in medical devices and biotechnology also flexed a little muscle for the year. Medical-device and medical-equipment start-ups brought four IPOs that generated $329.9 million for the year, while venture-backed biotechnology companies raised $130.5 million through two offerings.

According to the report, the outbreak of activity seen in life-science companies is the result of an increase in venture funding for those sectors due to the fact that life-sciences companies have seen a less dramatic impact from the recent recession compared to their information-technology peers.

Going Forward

However, the relatively weak IPO market has left some venture capitalists looking for other avenues to turn around their sagging returns.   The lack of exit opportunities also is partly to blame for the slump in new investments by venture capitalists. “It’s not a lack of good deals; it’s that venture capitalists have got their stables full of horses,” said Jesse Reyes, an economist at Thomson Venture Economics. “Until they put some of them out to pasture or send them off to the races, they can’t afford to put more in their stalls.”