World and Nation

Venture Investors Struggle To Sell Their Start-Ups

In 2008, entrepreneurs and venture capitalists had difficulty cashing out of start-ups, underscoring just how much the financial crisis has pummeled the technology sector.

Only six venture-backed start-ups went public last year, the fewest since 1977 and down from 86 in 2007, according to data released Monday by the National Venture Capital Association and Thomson Reuters. Venture capitalists sold 260 companies in 2008, down from 360 in 2007.

Stock market investors do not want to invest in initial public offerings, said Mark Heesen, president of the association. And “potential acquirers have just become much more conservative in buying — stock prices are so volatile that they don’t know how much money they have.”

Cisco Systems, the leading maker of computer networking equipment, is typically an active acquirer, buying 10 to 15 technology companies a year. In 2008, it bought only five.

The few companies that did go public have performed poorly. They raised $470 million in their public offerings, the lowest amount since 1979 and down from $10 billion in 2007. As of Dec. 31, only one company, CardioNet, which makes technology to monitor cardiac patients’ hearts outside hospitals, was trading above its offering price.

Acquisitions were more financially successful. Almost half of the companies acquired returned more than four times the amount of capital invested in them, according to the venture association. The largest sale of the year occurred when Dell bought EqualLogic, which makes storage systems for virtualization, for $1.4 billion in January 2008.

However, corporate acquirers may not continue to pay such attractive prices for venture-backed companies, Heesen said. He said that he feared Silicon Valley would return “to the post-bubble period where we saw a lot of acquisitions, but most of them were fire sales.”

If venture-backed companies cannot achieve public offerings or acquisitions, it could have a ripple effect. Some limited partners, like universities and pension funds, have sought to put off their commitments to invest, and venture capitalists said they are reluctant to back many early-stage companies without more certain gains.

“Right now, it’s really hard for us to think about doing a start-up investment,” said Annette Campbell-White, founder of MedVenture Associates, a venture firm in California.