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September 30, 2001

Are VCs on the Run?

By Colleen Marie O'Connor

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The average number of days it takes a venture-backed company to go public has grown dramatically.

From an average of 140 days between its first round of financing to its initial public offering two years ago, this period has expanded by - get this - 247 percent, growing to 487 days, according to Thomson Financial's Venture Economics.

Historically, it has taken seven to eight years for a company to go from its founding to an IPO, said Jay Ritter, professor of finance at the University of Florida.

Ritter, who has tracked IPO data for the last 21 years, says the last two-year period was a fluke and is unlikely to be considered an IPO benchmark, even though much money was raised. "We saw lots of Internet companies with incredibly high burnout rates," Ritter said.

It was more than greed that was driving the market in this period, Ritter said. "The 1999 to early 2001 [period] was unusual in terms of one industry dominating things. Very few IPOs outside of these sectors saw these sky-high valuations."

In fact, the IPO market in 1996 - and, further back in 1986 and 1983 - saw more deals completed.

IPO Bottleneck

The latest data didn't surprise the experts given the bottlenecked IPO market this year. Now the question is whether today's longer path to an exit strategy is toxic for the VC community?

In spite of the spring downturn, last year's market still saw 174 VC-backed IPOs. According to Ritter, venture-backed IPOs accounted for 59 percent of the total offerings from 1999 and 2000. From 1997 to 1998, it was at 29 percent. Through mid-August of 2001, there have been just 28 deals, according to Venture Economics.

But these numbers, contends business and finance attorney Ken Koch, do not paint an accurate picture.

"Those statistics don't reflect other vehicles being used. Although 1999 and 2000 were aberrations, the 2001 figures understate the level of market activity," said Koch, a partner at Mintz Levin Cohn Ferris Glovsky & Popeo. Koch noted the rise this year in public shells, or reverse mergers. (Public shells are a method for a private company to go public. The private company acquires a majority ownership in a publicly-listed company that has no assets or liabilities and is only a shell.')

"There's no question that it's much tougher to get VC financing," Koch said, "but there has been a rise in these previously shunned vehicles."

Another question the latest data raises, how long is long enough? Peet's Coffee and Tea (Nasdaq:PEET), the first IPO of 2001, had a gestation period of five years before going public. "In 1996 we were a strong Bay Area player with a vibrant mail order business, but we were not in grocery stores and in offices, where we wanted to be," said chief executive Chris Mottern. "Building the brand became the central focus. There are not many shots to take in the public market, and if you look at dotcoms, you'll see that it's true. That's why it's worth waiting."

IPO Craze