As in the Jean-Paul Sartre play “No Exit,” venture capitalists are facing an existential dilemma.

They are funding and developing companies with no immediate path to reward their limited partner investors. In the second quarter not a single venture-backed company staged an initial public offering, the first time in 30 years that there was a complete shutout, according to the National Venture Capital Association.

Also down were mergers and acquisitions involving venture-backed companies. For the quarter, the NVCA counted 50 deals worth a total of $2.4 billion. That meant first half’s total of 120 M&A deals declined 28 percent versus the first half of 2007.

Still some VCs with a contrarian bent maintain that truly innovative companies should not fret. After all, it was in this kind of climate that the last world-changing company was spawned—Google (GOOG).

Venture Capitalists Face an Existential Dilemma

“I think this is a great environment to launch a company,” said Rick Heitzmann, managing director at FirstMark Capital, the backer of StubHub, Flarion and Netegrity that was formerly known as Pequot Ventures. “Look at Google. That [company] got a lot of traction during the last recession. It’s a great time to start a company, but you’ve got to find patient investors.”

Online search leader Google went public in 2004 after recession hit the United States in 2001-2003.

Still, the NVCA, the lobbying and trade association for VCs, labeled the shutdown a “crisis for the start-up community” which depends in part on IPOs to pay off investors who can then shift their money to other early-stage companies. The cycle is getting longer, the organization noted, with the median age of a venture-backed company from founding to IPO hitting a 27-year high in 2007 at 8.6 years.

Though 22 venture-backed companies have registered for IPOs, “it’s clear they’re in a holding pattentern and waiting for the market conditions to improve, Jessica Canning, global research director for Dow Jones VentureSource, said in a statement.

Taking a longer view, Thomson Reuters, the data provider for the NVCA, noted that from 1991 to 1997 there were 1,353 IPOs versus 385 from 2001 to 2007.

In a poll by the NVCA, 77 percent of VCs said the IPO standstill could be attributed to “skittish investors,” while 64 percent cited the credit crunch and mortgage crisis and 57 percent pointed to the Sarbanes Oxley financial safeguard regulations that impose heavier costs accounting costs on public companies.

Mr. Heitzmann, whose fund manages about $2 billion of committed capital, maintained, however, that current market conditions are a “short-term blip” and “you can’t time market cycles.”

Still, in the near term, economic conditions can make a difference, said Richard Peterson, chief market strategist, Thomson Financial.

“The credit crunch leads to a slower economy,” he said. “A slower economy leads to lower earnings, which leads to lower valuations [for companies], which leads to lower bids [by prospective investors].”

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Ken Schachter

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