Will market woes hurt IPO market?

Some venture capitalists, who've seen improving conditions in recent years for taking companies public and cashing out investments, are worried the turbulence that has roiled financial markets this summer could spill over into their investment niche.

"When there's more risk in the world, people become more risk-averse," said William W. Helman, a partner at the Waltham venture capital firm Greylock Partners who fears a tightening of credit. "My guess is most venture guys haven't skipped a beat and are still investing like crazy. Maybe they should be stepping back and be thinking about it."

There is little evidence venture capital firms, which finance risky high-tech and life sciences start-ups across the nation, have encountered difficulty in arranging "exits" from their investments because of the market volatility set in motion by shocks in the subprime mortgage and housing markets.

Still, after climbing to 11 in May and nine in June, the number of initial public offerings in the United States slipped to six in July and five in August, according to the Thomson Financial research firm, though it's unclear whether firms were delaying their IPOs or just taking a summer breather. At the same time, the shaky markets have driven up borrowing costs for some potential buyers of venture-backed start-ups.

"The volatility is almost unprecedented," said Michael A. Greeley, managing general partner at IDG Ventures in Boston. "We obviously think a lot about it. If you're early-stage investors, classic venture capital, you're kind of inoculated from the volatility because you're not going to go public any time soon. The real danger is the impact on mergers and acquisitions, particularly for financial buyers. Their ability to borrow money to make acquisitions has clearly been constrained."

Corporate buyers such as IBM Corp., Microsoft Corp., and Cisco Systems Inc., which together have snapped up nearly two dozen Boston-area technology start-ups over the past decade, are less likely to be deterred because they tend to have large stores of cash. Even in those cases, however, the tougher market conditions could "take some of the premium out" of their acquisitions, Greeley warned.

Brian Hamilton, chief executive of Sageworks Inc., a Raleigh, N.C., financial firm that tracks IPOs, said venture capitalists should be less concerned about the housing and subprime mortgage woes than about a general loss of investor confidence.

"At a minimum, the problems in the subprime mortgage market have affected the psychology of all the other markets," he suggested. "So could it affect the psychology of IPOs? Sure it could."

But others think venture capital has little to fear from the roller coaster ride in the public markets, and might even benefit from them. Some noted that technology stocks, which lagged the general market during the expansion of the past few years, have outperformed other industry sectors during the recent months of volatility.

Referring to limited partners, like pension funds or university endowments, that contribute to venture capital funds, Maria A. Cirino, general partner for .406 Ventures, said, "A lot of investors who fled the venture category for buyout funds in the last couple of years are going to jump back in when the buyout bubble bursts" because of the rising cost of debt that is hanging over some private equity markets.

Venture capitalists cited high-tech success stories such as the software company VMware Inc., majority-owned by Hopkinton's EMC Corp., which sold 10 percent of its shares in an Aug. 13 public stock offering that soared 75.8 percent in its first day of trading, despite a 207.61-point drop in the Dow that day.

"That added a little glimmer," Mark G. Heesen, president of the National Venture Capital Association in Arlington, Va., said of the VMware offering. "Tech is looking pretty good now because of the problems in other sectors. People are willing to invest in tech IPOs."

Greeley and Cirino said venture-backed technology companies that are profitable or close to profitable, and have predictable streams of $75 million to $100 million in annual revenue, should be able to go public, even with the uncertainty on Wall Street.

"The bar was reset a couple of years ago to a higher level for venture IPOs," Cirino said, "and there's a welcoming market for companies that can meet the new criteria."

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