Altas holding its investments longer

NEW YORK (Reuters) - Atlas Venture, a $2.1 billion venture capital firm, is holding onto investments longer than in previous years due to a softness in the IPO market, senior executives of the firm said on Tuesday.

Waltham, Massachusetts-based Atlas, a long established venture firm with investments in 75 companies, has held off on a public market offering for software developer Spotfire, for instance, according to Jean-Francois Formela, a senior partner at the firm. At another time Spotfire would be an attractive IPO candidate since it generates substantial revenue and is profitable, he said.

Formela, speaking at the Reuters Hedge Funds and Private Equity Summit, said investors are more discriminating in buying shares in initial public offerings after having been burned by share drops for many tech companies during the 1990s boom.

And, said Formela, hedge funds are helping to drive down the overall prices for IPOs, causing IPOs to generate lower returns than in previous years.

"For companies to go public, the bar is higher today obviously than it was in the mid-1990s or late 1990s," said Formela. "The trick is to develop a business that is mature enough that the metrics argue for themselves. Some companies are going to come up short."

IPOs are one of the main means by which venture firms realize a return on their investment, with the other being a sale of their investment to a larger company. IPOs are typically priced by feeling out potential buyers prior to the offering. But statistics bear out Formela's views.

The number of venture-backed IPOs has dropped since from 93 in 2004 to 56 in 2005, according to the National Venture Capital Association. And 2006 is starting slowly, with only 10 venture-backed IPOs in the first quarter, although the year could yet pick up, the NVCA said. Furthermore, the average amount of money raised in a venture-backed IPO was $54 million in the first quarter of 2006, the lowest since 2002, the NVCA said.

For firms like Atlas, slack investor demand means longer holding periods for companies in the venture capital cycle, which is typically anywhere from three to seven years.

"It forces us back to the fundamentals of building businesses," said Axel Bichara, senior partner. "Even if there is no 'exit' market, you can still build profitable businesses and generate a return through organic growth."  Continued...