In the first quarter of 2006, 10 venture-backed IPOs raised a total of $540 million, compared to 10 deals in 2005, according to Thomson Venture Economics and the NVCA.
M&A activity was $4.8 billion in Q1 of 2006, up from $4.4 billion in 2005.
There were a total of 95 M&A deals with 42 disclosing values. Average disclosed deal value was $112 million in Q1 of 2006, up from $94 million in 2005. Roughly 33% of those deals returned more than 4x the investment, 50% returned 1x-4x, and only 17% less than the amount invested.
It took almost 6 years on average between founding and M&A exit.
With a continuation of this level of M&A activity, but without more IPOs, venture fund returns can be positive, but not extraordinary.
Anecdotally, we have been seeing a significantly improved quality of companies seeking funding in the first quarter. Emerging start-ups are demonstrating more revenue traction, reflecting a more stable economic environment. We’re also pleased to see more capital efficient business models. There are a few signs of a fresh supply of venture money chasing some sectors to unreasonable deal prices. Most of the Web 2.0 categories already appear too crowded with negligible barriers to entry. Examples include the video sharing space. At least consumers and advertisers are flocking to these sites. Fortunately, the vast majority of technology deals are at least attempting to strive for differentiation in reasonable market segments. Enterprises are still increasing technology spending.
As companies take advantage of lower costs of start-up and better demand, we would expect to see shorter paths to exit. The combination should help venture returns as the 2005 vintage funds progress through their investment periods over the next 3-4 years.
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