Fewer venture deals seen allowing IPOs to recover
Aug 3 2001 5:39PM
<<SAN FRANCISCO, Aug 3 (Reuters) - Less hot money chasing fewer venture deals this year is an equation for restoring equilibrium to the market for initial public offerings. So say Silicon Valley venture investors and industry watchers, who note that it was the glut of venture-backed Internet IPOs that caused investors to flee in the first place.
Venture capital funds put $10.6 billion into 982 companies in the second quarter of this year, a 61-percent drop from $27.2 billion in 1,873 companies in the comparable 2000 period, the industry's second most active quarter ever, the National Venture Capital Association and Venture Economics said this week.
Venture investments this year are on track to total $45 billion, less than half of last year's $92.9 billion, according NVCA research director John Taylor.
That slower deal flow shows venture managers now are more selective and geared to helping form solid companies rather than churning out hot IPO prospects, such as the raft of flimsy venture-backed offerings that helped sink the IPO market in 2000, analysts said.
Early stage investors now have strong incentive not to rush start-ups into IPOs. "When public markets come back, they come back cautiously, with most interest in more established companies," said Jeff Chambers, managing director of the Menlo Park, Calif. office of private equity firm TA Associates.
Chambers also said investors, now risk averse, will continue to be especially cautious toward unproven IPOs.
"In the early 1990s the percentage of companies going public though not profitable was about 25 to 30 percent, and that reached a peak in 1999 of over 80 percent," Chambers said. "Essentially the public market was providing late-stage capital, where venture capitalists had provided it before."
Playing late-stage venture capitalist has been a costly bet for public investors. The Warburg Pincus/Venture Economics Post-Venture Capital Index, which tracks all venture-backed IPOs in the most recent 10-year period, fell 50.1 percent over the 12 months ended on Aug. 2, compared to a 14.7 drop for the S&P 500 Index over the same time.
VENTURE-BACKED IPOS SLOW
A number of factors are driving the slowdown, but venture-backed Internet failures continue to burden venture capitalists, who need "liquidity events" such as IPOs to attract cash out on their stakes and be rewarded for assuming the risk of funding start-ups.
The second quarter was slow for venture-backed IPOs. Ten priced raising $817.7 million, compared to 59 that raised $4.7 billion in second-quarter 2000 and 69 in second-quarter of 1999 that raised $5.2 billion, according to Venture Economics.
Venture firms are still recruiting investors -- the number of $1 billion funds is growing -- but they can no longer sell them on the prospect of quick returns.
"In April 2000 if a company required funding and had a story it got funding," Stuart Chapman, director of the Palo Alto, Calif.-based U.S. headquarters of U.K. venture capital company 3i Group Plc . "This year with less investment going on you need to build a stronger case."
Stronger business plans and more venture fund oversight will help build healthier start-ups. The best of them, if they choose to go public, should help restore credibility to IPOs, analysts and investors said.
Memories of Internet fiascoes run especially deep along Silicon Valley's premier VC corridor.
"When you talk to people up and down Sand Hill Road, it's hard to find anyone to admit to having made e-commerce investments," said Dan Lankford, a partner with Menlo Park-based venture firm Brown Venture Associates. "We're going through an adjustment, a pretty severe adjustment."
BUILDING UP THE PORTFOLIO
Internet companies saw their share of venture funds fall to 28.4 percent from 34.3 percent in the first quarter -- and plunge from 48 percent in the second-quarter of 2000.
That decline was felt especially hard in Northern California, home to Silicon Valley and San Francisco and a key hub for e-commerce and dot-com start-ups.
Northern California remained the leading U.S. region for VC funding, but its share fell to 29.5 percent from 32.5 percent in the first quarter and 34 percent in second-quarter 2000.
The New York Tri-State area also saw its second-quarter share of VC funds drop, to 9.8 from 11.5 percent a year ago.
"The decrease in California and New York can be attributed to the decrease in investment in the Internet/E-Commerce sectors, an industry sector that remains prevalent in both regions," a statement by NVCA and Venture Economics said.
NVCA and Venture Economics also said expansion-stage companies took a bigger share of all second-quarter investment compared to the first quarter -- 54.9 percent and 47.4 percent, respectively -- while early and later stage companies saw slight drops in their shares.
"With an eye to the future, venture capitalists are working to build the companies in their current portfolio. At the same time, venture capitalists are increasing the diversification of their portfolios, both in terms of industry sectors and stage of development," NVCA President Mark G. Heesen said.>>
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BTW, Jill thanks for your comments and the link to Vendit's analysis of the NAZ.
Hope you enjoy the rest of the weekend. I'm heading out for a bike ride along the coast of Lake Michigan and later today I'm off to a friend's wedding in Chicago -- she is marrying a brilliant and entertaining guy from Bogata, Columbia. His English is perfect and he's just starting grad school at Northwestern. There should be an interesting collection of folks from North and South America at the wedding tonight...=)
Best Regards,
Scott |
