Last month, global stock markets suffered a 20 percent loss, which was a record monthly fall that domestic entrepreneurs are becoming more cautious in taking their companies public both at home and overseas. Many hopes of Chinese IT companies of hitting the initial public offering (IPO) jackpot have shrunk because of sharp falls in global stock markets in the past few months.

Not only has the IPO dreams gone, but the hundreds of millions of new capital that venture capitalists and private equity funds once bet on IT companies promising to become cash cows.

As a fast-growing IT company based in Zhejiang province, Randv.com has had to hold its plan to list on the NASDAQ after it received two rounds of venture capital packages. Since established in 2006, its net asset value has been rising by an average of 10 percent annually, said Zhou Xiao, Randv’s CEO. He said that they chose to suspend their IPO schedule because in such a depressed market, they don’t think they could get the price they want.

However, Randv is not the only one IT company that adopts such caution. From the reports of local media, many other fast-growing IT firms in Zhejiang, such as Intohotel.com and Focused Photonics, Inc, have also hold their IPO plans and wait for the market recovery.

Steven Hodgkinso, a research director at global analyst and consulting company Ovum, said, “The decline in stock prices will certainly make IT companies think twice about going to the stock market funding. The problem is that the existing shareholders will need to give away much more equity in exchange for shares to raise a given amount of capital.”

The number of newly listed companies in Shanghai A shares was 67 percent a year earlier. It was down to only 4 in the first half of this year, reported by Pricewater-houseCooper. What is worse, figures compiled by investment research and consulting firm ChinaVenture also showed that the most active industry in raising funds from the secondary market in the past, there were no single company in China going public last month in IT sector.

Zhang, who is a top executive from Hangzhou National Chip Science & Technology Co Ltd, said, “IPOs will be a path we must take for capital raising, but the schedule depends heavily on the external conditions in the next two or three years, especially when our orders have been slightly affected since some of our suppliers went bankrupt recently.”

It is reported that many companies have left financing through stock markets and seek alternative because of the significant effect of cracked liquidity and low return ratio on the capital market. Liu Zhiteng, an investment manager at Blue Ocean Capital (U2ipo) added that the weak global markets have nearly failed to function as a port for raising funds. A large number of venture capitalists are refusing to buy into IT startups currently.

According to the Securities Times, compared to 194.64 percent for 129 newly listed stocks in 2007, the average premium rate of the first day closing for 77 new-issued stocks on China’s two bourses was 112.54 percent last month.

However, the good old days have gone. Last November, shares of the largest B2B e-commerce company soared 192 percent on its first trading day on the Hong Kong Stock Exchange. And its raising funds of $1.5 billion also made it the largest IT offering since Google went public in 2004. But its share prices plunged to a 52-week low of HK$3.17 on Oct 27, despite its record of HK$41.8.

“The decrease of fixed income securities and stock prices has pushed venture capitalists to reallocate their investment portfolio, forcing them to get more prudent when pumping in cash,” Zheng said.

The benchmark index of China dropped 25 percent last month. It is the largest monthly slide since February 1995. However, the secondary market will become even worse than the primary markets, according to Hodgkinson, that is because of the flight of investors to companies with higher quality earnings and lower risk profiles.

He also added, it is said that venture capitalists are worried about the risks and returns. They will become more cautious about investing in startup IT companies when the risks are rising and the returns are going down.

Zheng said, costing apparently less, mergers and acquisitions would take over the role of trading which is primary to IPOs as its existing strategy.

“In an economic downturn, IT companies need to be prepared for the upcoming ‘winter’. Ideally, they should try to be debt-free, lean on cost structure, and beef up on cash flow and pricing power,” said Richard Ji, an executive director of Morgan Stanley Asia.

Suffering little supervision and over-competition, the financial crisis is not all bad news for the IT industry in China. When the crisis woes pass, the sector may be reorganized and turn to be much healthier.

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