Venture Exits – Year Ends With Rise in IPOs

After much debate on the death of venture, the data for the year pointed to positive prospects for 2007. 

In 2006, 58 venture-backed IPOs raised a total of $5.3 billion, up from $4.5 billion in 2005, according to Thomson Venture Economics and the NVCA.   The 4th quarter of 2006 showed 21 IPOs. 

M&A yielded $16.6 billion in 2006, up slightly from $16.1 billion in 2004.  Average disclosed deal value for the year was $114 million in 2006, up from $96 million in 2005.

The year ended with a boost from Google’s $1.65 billion acquisition of YouTube.  This transaction distorted the numbers in Q4, which showed a decline in the number of deals, but an increase in the aggregate value.  Net returns from M&A continue to be mixed.  Looking at Q4 of 2006, out of 23 deals, 7 returned more than 10x the amount invested, 8 returned more than 4x the investment, one 1x-4x, and 7 less than the amount invested. 

What are the exit prospects for 2007?  We see all the signs of a receptive IPO market.  IPOs from Q4 mostly performed well in the aftermarket.  Anecdotally, we understand there are at least a half dozen reasonably high profile technology IPOs in the pipeline for the first half of 2007, including NetSuite. 

What are the dynamics for venture investment in 2007?  Within our deal flow, we saw a higher number of companies with good teams, plans and initial results at the end of the year than we’d seen in many years.  Unfortunately, some of the better ones found other VCs willing to pay higher prices than we’ve been seeing on average in 2006 or 2005.  We don’t believe the exit prospects have improved enough to justify much price inflation.  Of course, the true test of prices paid for new investments in 2006 and 2007 will be the IPO markets at the end of the decade.  It’s all about finding the few deals that return 10x or greater.  Prospects for creating those hits appear higher than we’ve seen in years.