The venture capital industry is technology’s canary in a coal mine, so keeping an eye on its health makes sense. I recently had an opportunity to sit in on a presentation by Mark Heeson, president of the National Venture Capital Association, and he offered a number of insights worth sharing here.
The venture capital industry is technology’s canary in a coal mine, so keeping an eye on its health makes sense. I recently had an opportunity to sit in on a presentation by Mark Heeson, president of the National Venture Capital Association , and he offered a number of insights worth sharing here.
First off, Heeson says, reports that the canary is looking much like the “ex-parrot” of Monty Python fame are way off the mark. Despite the fact that the pile of dollars being divvied up by venture-backed companies remains dramatically below Internet bubble levels, the number of venture capital firms has remained relatively stable. Venture capital funds will dole out about $25 billion this year and some $70 billion from 2003 through 2005, as compared with about $210 billion during a three-year span in the midst of that bygone euphoria (see who’s getting the money in networking ).
“We have intense interest from [limited partners] in investing in this asset class right now,” Heeson says. “We’ll see about $25 billion being raised this year by venture capitalists, and that could easily have been $100 billion.”
As a result, would-be investors are finding themselves waving more money at funds than the funds are willing to take. Exacerbating that squeeze is the fact that more funds are accepting foreign dollars.
“You’re seeing some funds, which in the past took no foreign money, and are now taking 25% of their funds from foreign [sources]. And who’s that coming at the expense of? A lot of it is coming at the expense of your public” pension funds.
Those public institutions also are having their investment strategies hampered by federal regulations such as the Freedom of Information Act. As the venture community finds smaller funds possible and prudent, the desire to raise money absent the strictures of public disclosure becomes more tempting. Venture capitalists and their start-ups are valuing secrecy more – and longer.
“They’re saying we don’t want anybody to know about these early-stage deals,” Heeson says. “We’ll carry the first round on our own, maybe even the second if we can, and then once we think there’s something there then we’ll take this thing out with other venture capital firms or bring it out into the public domain.”
Not only have the dynamics of the front end changed for venture capitalists, the back end doesn’t look at all like it used to either. Those sexy initial public stock offerings that made the bubble years so bubblelicious have all but disappeared, with only 20 IPOs of venture-backed companies in the first six months of this year.
“That is pretty abysmal, and many of those venture-backed IPOs have not done terribly well since they’ve gone public,” Heeson says. “Only about 50% of them are trading above their opening level. It’s still a real poor environment to go public right now.”
Curiously enough, however, this abysmal record isn’t stopping a lot of start-ups from filing the paperwork necessary to launch a stock offering. It’s apparently a bit of a head-fake combined with cagey salesmanship.
“What we’re seeing more and more of is this double-tracking strategy: They’re saying, ‘I’m registering to go public, but I’m not really going public – I’m for sale. And, by the way, because I’ve been able to register, I’m Sarbanes-Oxley compliant, so I’m clean.’ “
This approach offers a better exit scenario than an IPO, Heeson says, primarily because the mergers-and-acquisitions climate is much more hospitable. The M&A tally has held steady at about 350 deals annually for several years now – and those companies that are being bought are fetching more money, too.
“We actually have a very good M&A market right now. We’re seeing very strong acquisitions across the board in all technologies: life sciences, communications, IT,” Heeson says. “Two years after the bubble we had literally not a single acquisition where you got more than four times your [invested] money. This year we’re going to have at least a third of all acquisitions at four times the money put in, and many of them are going to be 10 times what was put in.”
Sounds healthy enough.
Care to venture an opinion? The address is buzz@nww.com.
