The market for venture backed IPOs in the U.S. in the first quarter of 2015 was box IPOthe weakest in two years, both in terms of number of deals and aggregate proceeds, according to pre-IPO institutional research firm Renaissance Capital, as well as a separate exit poll report by Thomson Reuters and the National Venture Capital Association. There were only 17 IPOs of venture-backed companies, compared with 30 in Q4 of 2014 and 40 in Q1 2014.  Venture backed IPOs raised only $76 million in average proceeds in Q1 2015, compared with $147 million and $80 million in Q4 and Q1 of 2014, respectively.

So what’s the reason for the overall weakness in venture backed IPOs?  According to Emily Chasan of the Wall Street Journal, venture backed companies are resisting going public because they’re receiving better offers in the form of late-stage private equity funding.  She cites a survey performed by BDO USA in which over half of the investment bankers surveyed attributed the IPO decline to widespread availability of private funding for companies at attractive valuations.  Basically, all the funding but without the hassle of being public.  This would be especially true of venture backed technology companies.  The $1.2 billion that technology companies raised in first quarter IPOs pales in comparison to the estimated $10 billion raised in private equity rounds during the same period of last year.

Another contributing factor may be a section of the JOBS Act that allows companies to stay private longer.  Title V of the JOBS Act passed in 2012 generally increases from 500 to 2,000 the threshold number of shareholders of a class of equity securities that triggers registration and reporting requirements under Section 12(g) of the Securities Exchange Act of 1934 for companies with more than $10 million in assets.  This generally allows companies with fewer than 2,000 shareholders to choose to stay private longer, enabling them to defer the cost, public scrutiny and increased liability of being publicly-traded and increasing their ability to time their initial public offerings based on market conditions.

Deliberately postponing an IPO until some point down the road could be risky.  IPO markets have short windows which often close quickly and are unpredictable.  A company opting for late-stage private equity funding and deferring an IPO may find the IPO market closed later on when the company is otherwise ready.

Another explanation for the relative weakness in small company IPOs is a series of reforms by the SEC generally referred to as decimalization. The regulatory efforts by the SEC to modernize the securities trading system beginning in 1997 may have had the unintended consequence of removing the financial incentive for underwriters, analysts, market makers and others to transact in and provide support services for issuers of small company stocks.  This is a theory long asserted by leading capital markets reform advocate David Weild.  My previous blog about decimalization and David’s theory could be found here.

It remains to be seen whether the weakness in venture-backed IPOs will have any short or long term impact on VC fund investments in startups and emerging companies.  Investors need to be confident that there’s a strong likelihood they’ll be able to exit their investments successfully.  The traditional VC exit strategy consists of either an IPO or an acquisition.  Making matters worse for VCs is that total exits for venture-backed companies, including mergers and acquisitions, in North America also dropped in the first quarter to 181 deals totaling $4.91 billion from 255 deals totaling $14.07 billion in value in the first quarter of last year, a 65% decline, according to PitchBook Data Inc..