Venture Exits – Growth IPOs Are Back

We can now look back at three quarters where multiple venture-backed companies successfully reached the public markets.  In Q1 2007, 17 venture-backed IPOs raised a total of $2.1 billion, up from 10 IPOs in Q1 2006, according to Thomson Venture Economics and the NVCA.

M&A activity fell to 62 deals in Q1 2007 from 104 in Q1 2006.  However, average disclosed deal size was up significantly to $161.2 million, compared to many years below $100 million.

After market performance of many of these IPOs has been positive, although a few, like Sourcefire, have faltered after announcing disappointing results.  We now have enough data points to declare a trend. 

Public market buyers are again investing in smaller capitalization technology companies, looking for growth to boost investment performance.  This is a sharp contrast to years of more risk adverse investing behavior.

Investors had many reasons to be scared away from growth stocks, facing multiple points of trauma from the bursting bubble to terrorism and the fumbled political response to Katrina and a fearful new awareness of environmental challenges.  Through most of this decade, the winning investment strategy was to actively trade among global asset classes from oil to emerging markets with hedge funds.  With increasing public market volatility, buyout funds have profited by taking companies out of the public markets. 

While it’s hard to hope for public market stability, we see a good case for growth stocks to work again.  We have heard from various public investors that they are starved for growth.  The larger companies are either growing more slowly or more expensive. 
With years of M&A activity between public firms, there are few smaller technology growth stocks remaining.  There have been plenty of private companies achieving growth, but forced to sell out prior to attempting an IPO.  IPOs are usually necessary for smaller companies to cross the marketing chasm to achieve higher, sustainable rates of growth. 

We have seen new markets emerge across technology sectors.  Web 2.0 has been getting more media attention, given the surge of consumer activity and rush of advertisers to join the crowd.  Consumers keep showing an insatiable appetite for new devices and increased bandwidth in the digital home, providing opportunities for underlying semiconductor and other communications technologies.  Enterprises are still spending money on software, particularly as they use more web-based applications.  We see room for many new growth areas. 

While pessimists can still point to excess capital in venture, but that has been a factor during previous periods of above average returns by capturing the upside on a few big winners.