A Very Dry Q2

Public market skittishness again impacted exit activity, with NO venture-backed IPOs in the second quarter.  There were 56 M&A deals for venture-backed companies, down from 89 in the second quarter of 2007.  Average M&A pricing did rise to $171 million, up from $110 million. 

Taking a longer view, there were only 385 venture-backed IPOs from 2001-2007, compared to 1353 from 1991-1997. 

 

We don't expect the IPO market will recover until after the election.  This could be postponed depending upon how long it takes for the bad news to become fully reflected in the public markets.  I do not believe that we have seen the full impact of credit/real estate problems combined with higher energy/food prices on the consumer.  We may see capitulation before the election, but we may need to see data for the fourth quarter.  If there is an IPO market in the fourth quarter, I'd expect it would be highly selective. 

This should set us up for a reasonably sharp rebound for IPOs in 2009, albeit from depressed levels.

Looking to venture exits for the remainder of 2008, we would still expect modest volumes of acquisitions.  We were surprised that the average price of M&A deals increased in the second quarter, which does not seem sustainable. 

This appears to be creating attractive opportunities for new investing.  I have not yet seen data for pricing of venture rounds, although anecdotally we're heard that pricing has started to soften.

In my view, this is just part of the natural cycle for venture.  The difference is that the negative part of this cycle has been extended.  It's clearly taking longer to make money from venture investing.  In 2007, the median age of a venture-backed IPO was 8.6 years.  This should still allow positive venture returns looking out over the next 5-10 years, particularly relative to other asset classes.  The winners of the last 5-10 years were buyout and hedge funds that depended on leverage.  Venture provides returns without leverage.  We saw public start to appreciate growth stocks in 2007 and I believe it is inevitable that they will again, fueling the next window for venture-backed IPOs.