Companies rethink jumping into market

The IPO has gone MIA.

Faced with falling stock prices and sputtering credit markets, companies planning to go public this year have either withdrawn or delayed their debuts on Wall Street.

Nationwide, there were no venture-backed initial public offerings in the second quarter, the first IPO-less quarter since 1978, according to the MoneyTree report by PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Financial.

Companies "are putting their pencils down for the rest of the year," said Jon Salveson, head of investment banking at Piper Jaffray & Co. "No one wants to take that pricing risk."

Pricing a new company's value is tricky and depends a great deal on market momentum, Salveson said. Given the country's credit woes and volatility of the stock market, companies are opting to wait out the crisis or seeking financing from private investors, he said.

"There is a big backlog of high-quality companies" waiting to go public, Salveson said. "But even they see it will take longer [for the markets] to reestablish liquidity. They are not banking on the markets to recover anytime soon."

In the first nine months of this year, 77 companies withdrew their IPOs, 19 in the third quarter alone, according to Bloomberg data. Fifty-five companies went public, down from 226 during the same period in 2007.

AGA Medical declined to comment on its IPO plans. A Cardiovascular Systems spokesperson did not return a phone call seeking comment.

With so many IPO-ready companies clogging the starting gate, only a few of them will find willing investors once the stock market rebounds, experts say.

"There are good candidates for IPOs that are stacking up," said Jay Hare, an analyst in Minneapolis for PricewaterhouseCoopers. "Once the window opens, [the market] will be more selective."

And because the IPO market is in tatters, venture capitalists will hold on to their investments longer, experts say. As a result, those companies will need to generate larger IPOs so that investors can recoup the extra costs.

"The exit slowdown will likely lengthen the VC-backed company life cycle, with VCs extending follow-on financing for later-stage companies that might otherwise have been ripe for exits," the MoneyTree report says. "[Venture capitalists] will also be under greater pressure to grow IPO candidate big enough to succeed in a more rigorous and expensive IPO process.

The report also warned that VCs may shy away from funding start-ups that require lots of time and money.

Michael Gorman, managing director of Split Rock Partners in Eden Prairie, said his firm normally holds investments five to seven years. Now the VC firm, which mostly invests in early-stage start-ups, will need to stick around for two to four more years.

The weak IPO market "has a cascading effect on emerging companies," Gorman said. "It means one less source of capital for companies to grow. They will have to rely more on private capital to fuel their growth."

Despite the market woes, entrepreneurs are continuing to start companies and look for financing, said Dan Carr, chief executive of the Collaborative, which brings together local financiers and technologists through forums and networking. The organization's annual Minnesota Venture Capital Conference, which begins today, boasts more registered participants than last year, he said.

Gorman of Split Rock says the firm will continue to invest in new companies. But the firm will be even more picky, favoring companies that don't need continuous funding.