Sour stock market stalls initial public offerings

— -- The struggling stock market is even hurting companies that haven't gone public yet.

The initial public offering market, an important source of cash for young companies that are eager to grow, has virtually shut down as shell-shocked investors shy from enterprises that lack a solid performance record.

There were just 43 initial public offerings last year, down from 272 in 2007 — and making 2008 the worst year for IPOs since 1978, Renaissance Capital says.

The immediate future isn't much brighter: There are no IPOs planned until mid-February. There were at least 10 IPOs each January over the last three years.

The frozen IPO market has made it especially hard for certain businesses to expand:

•Start-ups. Lenders often are reluctant to lend to new ventures and, if they do, require high interest rates. So getting locked out of the stock market is a double hit, says Paul Bard of Renaissance Capital: "It places pressure on growth companies."

•Venture-capital firms. Venture capitalists often sell companies as IPOs to raise cash for new investments, says Jay Ritter, professor of finance at the University of Florida. VC investments already started to slow in the third quarter of 2008, falling 8.9%, to $7.1 billion, from the same quarter in 2007, says the latest data from the MoneyTree. "If this (IPO drought) is protracted, it could be quite serious," says Josh Lerner of Harvard University.

•Investment banks. Banks collect hefty fees when they take firms public — and those are vanishing at a time when Wall Street is trying to restructure. "The investment banking staffs are cut way down," says Francis Gaskins of Gaskins IPOdesktop.

There's a chance that the IPO drought will help in the long run. VC firms are funneling cash into companies they own that have the best chances, making them stronger, Ritter says.

Meanwhile, investors are getting solid returns on shares of the few IPOs getting done, Bard says. For instance, shares of the last company to go public, education firm Grand Canyon Education, are up 70% from their first-day closing price in November.