VentureBeat

If you’re wondering why we haven’t been covering much IPO news recently, it’s because there hasn’t been any — there were literally zero venture-backed IPOs in the second quarter of 2008.

This is the first quarter since 1978 that has gone by without a single venture-backed IPO, according to a new report from the National Venture Capital Association and Thomson Reuters. The figures are also down quite a bit from the high times of 2007, including the 25 IPOs during Q2 of that year, and the 31 IPOs in Q4. There were a total of 87 IPOs last year, while 2008 is a wee bit behind, with only five IPOs in its first half.

While “zero IPOs” is the most eye-catching figure, the report also shows a drop in the number of mergers and acquisitions — there were only 50 in Q2 2008, lower than any quarter in 2005, 2006 or 2007. The chart below shows both IPOs and mergers for the past 20 years (the final bar shows only the first half of 2008, of course).

The decline isn’t surprising given the broader economic climate, but when both traditional exit avenues dry up, that’s not just a bad sign for VCs, but for startups in general. Of course, the best startups are the ones that can weather tough times and are ready to come roaring back when the economy picks up again. (Meanwhile, to make it through the drought, some VCs are looking for alternate sources of liquidity.)

At the end of June, the NVCA surveyed its members and found that 81 percent of the 660-plus respondents said they don’t expect the IPO window to open anytime this year. The three leading causes for the drought are, in descending order, skittish investors, the credit crunch/mortgage crisis and the increased costs created by Sarbanes Oxley regulation, according to the survey.

Today’s VentureWire brings news of another company to take a hit from the economic climate — Bayhill Therapeutics, a Palo Alto, Calif.-based maker of autoimmune disease treatments, withdrew its IPO last week.

[Photo from the National Climactic Data Center]

I just got home from the annual meeting of the National Venture Capital Association, which was a fun experience. This may sound a little weird (especially since I’m not looking to get funding for a startup anytime soon), but it was actually kind of exciting to be in a conference room full of venture capitalists. They are, after all, the heart of what we cover at VentureBeat, but until now I’ve only been able to meet a few of them. Even better, I got to pick some of their brains.

The meeting’s highlight was watching famed venture capitalists John Doerr and Michael Moritz interview each other, but there were other events of interest. In this mobile post, I summarize some of the discussion on policy issues relevant to VCs (the short version — significant legislation is unlikely to pass this year) and talk about my general impressions of the conference.

Note: I mention the carried interest tax, but don’t go into much detail so as not to bore people to death. Those of you who are interested can read more at the NVCA’s website, as well as our article about why we support the tax.

Updated

Venture investment fell 8.5 percent during the first three months of 2008 compared to the final quarter of 2007, according to the new MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. The report is a big, comprehensive study that reinforces what everyone already kind-of knew, or at least suspected. It tracked a total of 922 venture deals worth $7.1 billion — in terms of dollars, that’s an 8.5 percent drop.

In a conference call discussing the report, NVCA Vice President John Taylor emphasized that investment tends to be cyclical, and that the first quarter of the year tends to have less investment than the second or the fourth. But Q1 2008 was also down from the $7.5 billion in venture money invested during the same period last year.

Nina Saberi, a partner at Castile Ventures, said one of the most significant factors that will continue to hurt venture investment is the decreasing number of IPOs — according to the NVCA, there were only five IPOs during the first quarter of 2008. The acquisition market is weakening too, Saberi said, which is putting downward pressure on valuations. All of this means venture firms need to support startups for a longer period of time before their exits, and that firms therefore need to be more careful with how they invest.

First-time deals also fell 18 percent to $1.6 billion invested in 294 companies. Those deals accounted for 23 percent of all venture dollars during this period.

“We see from an early stage investing point of view, the economic slowdown has had an impact and perhaps people are being mindful of the economic slowdown,” Saberi said. “But, at the same time, the effects of it are milder than you might imagine from listening to the evening news.”

The report also breaks the deals down by industry. Biotech received the most money, with $1.27 billion going to 126 deals, but software had the most deals, with $1.26 billion in 234 financings.

Update: Dow Jones VentureSource has broken down Q1 investment by region (see screenshot, left). Not surprisingly, the San Francisco Bay Area saw the most money invested, with $2.56 billion in 213 deals. Southern California came in second, with $672 million in 63 deals.