IPOs backed by venture capitalists at a standstill

The recession brought the U.S. market for initial public stock offerings to a halt in the fourth quarter, closing the worst year for IPOs since 1977, the National Venture Capital Assn. said Monday.

No companies backed by venture capitalists went public in the fourth quarter, and only six staged IPOs in all of 2008, the association said. Emerging businesses also had trouble merging with larger companies, with just 37 venture-backed firms selling themselves in the fourth quarter. The annual total of 260 was the lowest since 1999.

The slow market stunts creation of new companies and innovation, the venture capital association’s president, Mark Heesen, said. Venture capitalists will cut investments in new companies and slow their own efforts to raise new capital until they have a better outlook for selling young companies profitably, he said.

“The major ripple effect when the IPO market is closed and the merger market is slow is that there are birds in the nest that should have flown away by now,” Heesen said. “If birds stay in the nest, venture capitalists have less time and less money for new companies, new ideas, new technologies.”

Public-market investors are keeping their distance from IPOs because they are looking for defensive investments, said Kathleen Smith, president of Greenwich, Conn.-based Renaissance Capital, which runs the IPO Plus Aftermarket Fund.

“They’re shunning all IPOs, really, because they’re shunning the market,” Smith said. “They’re looking for safety, and the larger, more liquid companies tend not to be the growth companies a venture capital firm might own.”