In a spate of recent articles, it would seem that the world has come to an end in terms of high-tech IPOs—not to mention venture backing of early-stage start-ups. Because of the recent market turmoil, the M&A market has has come to a screeching halt and the window of opportunity for IPOs has shut completely. Even angel investors are rethinking investment moves.
According to recent articles in Wired, VCs are mostly pumping money on hand into existing portfolio companies or in large, established start-ups that have already gone through several rounds of funding. What's more, the slow down may hit the Midwest even harder. Mirroring the region itself, Midwest VCs have are a lot more conservative in their investing than coastal investors.
Companies looking to secure financing are needing to look beyond venture groups to a variety of non-traditional sources such as hedge funds, retirement accounts, family trusts, deposed dictators, individual or angel investors. Even the tried-and-true home equity route is shut down.
Reuters reported that the biotech industry has not seen an IPO since November 2007, when Nanosphere, which develops diagnostic tests, made its $113 million debut at the bottom of its price range. Since then, it is down 68 percent. Those waiting in line are finding no exit. In the last two weeks, nearly half of the biotech companies in the IPO pipeline have dropped out. Five biotech companies remain in the pipeline, with deals totaling $330.5 million, according to Thomson Reuters data.
All this is counter-intuitive. Biotechs are companies that generally sell products—diagnostics and therapeutics—that are unaffected by market conditions. Then why the long face for biotech start-ups? The market is skittish about the length of time for return on investment and the prospect of huge returns. Only seven of the 61 biotech companies to have gone public since 2000 are currently trading above their IPO prices.
So, what is selling? Biotechs with products ready for market. The venture spigot is off for early-stage companies including most any Phase I or Phase II stage company. Right now, companies on the early side of the curve will need to look to doing more partnerships and mergers.
While all the doom-and-gloom strikes fear in many, start-ups and entrepreneurs say that money just isn't flowing, it could be that this is the perfect time to invest. Start-up equity can be found cheap in this buyer's market. OK, admittedly, you don't get money for having an idea scratched out on a bar napkin just because it involves the Internet and sock puppets, but there are still opportunities to be had.
The key to survival in this market—as it should be in all markets—is having a great management team and a low burn rate. That's a winning venture. DDN
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