Venture-backed IPOs plummet in the 1st quarter

A weakening market for initial public offerings in the first quarter is causing jitters among venture capitalists who fund start-ups.

The number of IPOs by venture-backed companies tumbled to 10 nationally in the three months ended March 31, from 17 in the previous quarter, according to figures released yesterday by the National Venture Capital Association, a trade organization.

While the 10 companies that went public in the first quarter matched the number in the first and second quarters of last year, the average sum raised by the IPOs in the most recent quarter fell to $54.1 million, and the median amount raised dropped to $39.5 million, the lowest levels for both measures since the third quarter of 2002.

''We're getting more concerned about the state of the IPO market," said Mark G. Heesen, president of the venture capital group. ''We're continuing to see a very dreary record on the number of IPOs and on the average offer amounts for the past five quarters."

The languishing IPO market for venture-backed companies, and the future of US capital markets in the face of fresh competition from more IPO-friendly foreign exchanges, will be among the subjects discussed at the upcoming annual meeting of the venture capital association on April 26 and 27 in San Jose, Calif., said Heesen.

Of the 10 companies that had IPOs last quarter, the largest offering -- and the only one from New England -- was from Altus Pharmaceuticals Inc., a Cambridge biotechnology firm that raised $105 million in January. Eight of the 10 IPOs were life sciences firms.

On the acquisition front, the first-quarter numbers were more encouraging. Ninety-five venture-backed companies were sold in the January-to-March period, up from 86 in the fourth quarter and 82 in the first quarter of last year. The total value of the deals for which financial terms were disclosed climbed to $4.8 billion in the first quarter from $2.5 billion in the fourth quarter and $4.3 billion in the year-ago quarter.

But the rising valuations weren't enough to ease anxieties in the venture community, Heesen said. While it hasn't happened yet, he said, there is concern the lackluster IPO market could create a drag on mergers and acquisitions, now the most popular ''exit" for venture firms.

Venture-backed start-ups, which tend to be concentrated in the high-tech and life sciences fields, make up only a portion of all IPOs but the largest share of those in the Boston area. Overall, there were 38 IPOs in the first two months of 2006, the most recent period for which figures are available, compared to 24 in the corresponding period last year, according to the accounting firm PricewaterhouseCoopers.

David A. Westenberg, a partner in the corporate practice of law firm WilmerHale in Boston, said he doesn't see the IPO market faltering.

''I think it's substantially unchanged from where it was most of last year, which is OK but not great," said Westenberg, who handles IPOs for companies. ''VCs are increasingly choosing M&A for liquidity."

Only companies with profits and a sustainable business model can make it through the IPO window today, said Scott Tobin, general partner at Battery Ventures in Wellesley. ''You're really seeing a higher quality bar on which the public companies are willing to accept," Tobin said.

While Tobin said that might not be a bad thing, others think the venture capital business could benefit from a stronger IPO market.

''You can make a triple or home run off an M&A deal, but you can't do a grand slam," Heesen said. ''And venture capital firms need a grand slam every once in a while to offset losses in their portfolios."

Robert Weisman can be reached at weisman@globe.com.

READ THE ENTIRE REPORT

From the National Venture Capital Association at boston.com/business.