The IPO market, she is a fickle mistress.

In the first half of 2011, the IPO markets were looking strong for VC-backed companies.  In the software an internet space a number of companies obviously had strong public offerings (LinkedIn, Yandex, Pandora, RenRen, et al).  For a time that meant that other category leaders accelerated their own IPO plans… think Groupon and Zynga.  And even other strong, but perhaps not standout, companies like Active Network and Demand Media completed their own offerings.  Bankers licked their chops.  VCs dreamt of liquidty.  Life was good.

How diffferent 2H 2011 looks.  Groupon and Zynga both pospone roadshows planned for after Labor Day.  The window has effectively shut temporarily for companies that aren’t blockbusters.  But let’s separately the truth from the fiction for a moment.

The WSJ published a story yesterday with a splashy headline that the majority of US IPOs for this year were currently underwater, meaning their shares were trading for less than the original offering price.  This is clearly true and obviously sucks for any investors who bought these shares in the offering and currently hold them. But if you read the whole article you glean more insight… the entire public equity markets have sunk in the last 3-4 months.  WSJ even points out that poor IPO performance “can be blamed primarily on the overall stock market”.  In fact IPO shares have outperformed the broader S&P 500 over comparable time periods.

Bad economic news in some countries and gloominess across the globe continues to weigh upon all financial markets.  Institutional and individual investors have clearly been shying away from risky assets in favor of those with less risk (actual or perceived)… hence $1800 gold, Swiss franc frenzy, and record low yields on US treasuries and Germand bunds.  Also portfolio management strategy has shifted a bit in recent years, and many large investors now evaluate at all risky assets together (US tech IPOs, Brazilian bonds, Chinese private equity, etc) rather than making discrete allocations to each bucket.

What will happen for the startup IPO market?  Like everybody else, I’m lacking a crystal ball.  What does seem to be true is that the current aversion for new IPOs is mostly due to general lack of appetite for risk at present, rather than something intrinsic to growing tech companies.  The very strongest companies can still likely get out if they really wanted, but may not command the valuations they hoped for in more bullish times.  The second tier of companies probably have to wait whether they like it or not.

I have no idea if the “window” will open more broadly in 2 months or 2 years.  The global macro conditions could weigh heavily on the IPO market for awhile.  Or growth and sound economic policies in developed countries could return quickly.  I know we all really would like to know “when?” but either way, the IPO market will undoubtedly return.