SF Venture

Venture Exits Rise in 2007

In 2007, 86 venture-backed IPOs raised a total of $10.3 billion, up from 57 IPOs raising $5.1 billion last year, according to Thomson Venture Economics and the NVCA.  Of this total, there were 47 Information Technology, raising $6 billion in 2007.

As of December 31, 2007, 58% of those IPOs were trading at or above offering price. 

The value of M&A deals rose significantly.  There were 304 deals disclosed in 2007 worth $23.7 billion, compared to 363 deals worth $17.1 billion last year.  Average disclosed deal size jumped to $176 million, compared to $111 million last year.

All of this occurred despite the volatility in the public markets associated with the credit crunch.  IPO activity fell off in December, but we view that as more a sign of investor fatigue than of a lack of demand for technology IPOs.  In 2008, we believe public market investors will continue to pay a premium for growth. 

Venture Exit Values Rising Despite Credit Crunch

In Q3 2007, 12 venture-backed IPOs raised a total of $945 million, up from 8 IPOs raising $935 million last year, according to Thomson Venture Economics and the NVCA.

The value of M&A deals rose significantly. There were 34 deals disclosed in Q3 2007 worth $7.7 billion, up from 41 deals worth $3.8 million last year. Average disclosed deal size jumped to $226 million, compared to $92 million last year.

According to VentureOne, which included estimates for deals not disclosed, the total was $10.9 billion from 90 deals. This suggests an average of $121 million per deal. The median amount of capital raised before acquisition was $21 million.

All of this occurred despite the volatility in the public markets associated with the credit crunch. We believe both corporations and public market investors will continue to pay a premium for growth.

Next Productivity Wave Will Refuel Technology Growth

I recently saw a chart of US productivity, which jumped out at me, suggesting that we are now at an inflection point. 

The trend in productivity has been down, with some 3 years of declines in the year over year rate of productivity gains.  The chart below shows the annual rate of change for non-farm business output per hour.  The source is the U.S. Bureau of Labor Statistics. 

Cisco’s John Chambers has been talking this year about how Web 2.0 tools, particularly around collaboration can be a boost corporate productivity.  I believe that there is a broader range of relatively recent improvements in technologies from core enterprise software to communications equipment that can fuel a significant boost to productivity over the next few years. 

Many are concerned about the credit crunch having a wider impact than just consumer spending.  There has been speculation that financial institutions might cut budgets.  I have a different forecast.  I believe enterprise IT spending will keep increasing if there as we see increased returns on investment through productivity gains. 

I’ve been tracking many enterprise software companies, including some in our portfolio, that deliver significant ROI to customers.  The current generation of software is just beginning to penetrate the market, suggesting significant potential for productivity enhancements over the next few years, helping to accelerate adoption of technology for venture-backed companies, both private and public. 

VentureBeat Articles On Credit Crunch And Tech Stocks

Matt Marshall just published a article on the credit crunch subject. 

I had been talking to Matt on the subject and I had provided him with further thoughts, which he just posted as a guest column:

Technology stocks swinging back into favor.

NYT Article - Innovative Web Marketing

The New York Times ran an article today about Bigfix and it's viral ad campaign.  I typically don't post about my portfolio companies, but this subject is entertaining.

There was also a good article in the San Francisco Chronicle on the beginning of the campaign: Viral campaign spreading.

Click here for link to today's article,

Campaigning Not for Your Vote but for Your Dollar

 

   

 

NYT Article - Subprime Fallout Could Help Venture Capitalists

I'm quoted in today's New York Times. 

“People are being scared away from other investment strategies,” said Keith Benjamin, a partner at Levensohn Venture Partners, a San Francisco firm that focuses on technology investments.

Click on here for link to article.

The credit crunch can help venture - One man’s ceiling is another man's floor

I believe the current credit crunch can actually help venture returns. Why?  Because it will help build momentum for the technology IPO market, which is what really drives venture returns.  Investors have finally demonstrated a willingness to buy technology IPOs. There were some 36 technology IPOs in 2006.  I expect to see that number roughly double in 2007. 

In the middle of the liquidity crisis, VMWare went public, traded up sharply and stayed there. 

Why do tech stocks now look better?  Because alternative investments don't look as attractive.  Investors shied away from tech stocks for years, fearing the post-bubble risks.  Leveraged investing strategies were perceived as less risky. For the last five years, I’ve watched the skyrocketing returns from hedge funds and buyout funds with jealousy, wondering if I was missing something.  I believe we have just witnessed a sharp shift in perception of the risk for those leveraged investing strategies. 

I have taken a long-term view on the positive potential for venture returns, but admit it’s been a bit tiring to be in the less loved asset class.  I have assumed that much of the returns from hedge funds and buyout funds have often simply been a function of magnifying small fundamental returns with significant leverage.  Of course, there are some great managers in each class who deliver strong fundamental returns, but that seems to have been the exception.  Less credit and/or more expensive credit will hurt these asset classes.

Fortunately, venture is not dependent on credit. I do not see a sustained credit panic and public market meltdown.  I believe the financial markets will recover, albeit with tighter credit.  The current environment could prove ideal for venture returns.  My key assumption is that technology IPOs become more attractive as public market investors look for investment returns from growth, not leverage.   

All this reminded me of Paul Simon's song.  As hedge funds and buyout funds may have hit their ceiling, there is a good floor under technology venture today. 

How to Make VCs Happy

Paul Deninger, Vice Chairman, Jeffries & Company gave a great talk at the AlwaysOn: Stanford Summit, with the dramatic title, Why Aren’t VCs Happy?  It starts out a bit heavy, suggesting that VCs should be unhappy in the currently shaky financial market, but ends with a constructive point.  The key to future happiness will be to resist the temptation to sell companies prematurely and make the effort to prepare companies for the public markets.  He asks what if Cisco had sold itself to AT&T instead if going public at roughly a $250 million market cap.  He notes that the public markets are now receptive to growth companies with a market capitalization under $500 million, counter to the post bubble myth.  I agree that the key to venture will be to patiently strive to create growth companies and be prepared to undertake the costs and hassles of the public market in exchange for the potentially significant rewards.

iPhone Fun

I bought my wife an iPhone on the Apple web site right at the launch time.  It seemed easier than waiting in line.  Setting it up was simple enough, although Verizon was slow to hand her number off to AT&T.  Took three days and three calls, with the last a conference between the two, but it finally worked.  I remain a bit worried coverage gaps, having been pleased with Verizon, but not evidence yet.  Her response has been refreshing.  She’d broken her last phone, a basis flip, which she never liked, on grounds of both fashion and function.  She had a tendency to keep it off and buried in her purse.  She is quite happy with the iPhone, displaying it proudly.  Most importantly, she leaves it on.  While she complains that it’s hard to use the virtual keys, she’s discovered text messaging.  The email function is weak, primarily because of the slow network speed, but I hadn’t expected an easy integration with our home exchange server.  A PDA would just not have made the right fashion statement.  She’s just starting to check out the various features.  Playing with pictures is quite cool.  For just phone functions, text, and fun, it’s a big leap for my wife and family communications. 

Fighting The Sarbox Monster

There is an excellent editorial in today's Wall Street Journal by Robert Grady of Carlyle.  The Sarbox Monster provides a well organized list of reasons why the IPO market remains largely unreachable the the downstream cost to the U.S. in terms of job creation and innovation.  The article is light on recommendations, but puts the problem is a constructive context.  I view the article as a sign of a more receptive climate to Sarbox reform and other regulatory changes to correct prior political short-sightedness.  Bob reminds us that essentially all of the value creation from venture has occurred through the growth of companies after an IPO.  Fortunately, public market buyers can remember that these winners outweighed the losers, even after the bubble, as evidenced by recent buying of smaller technology IPOs.  It appears that both politicians and buyers may be finally positioned to facilitate positive changes.

Sarbox reform will be necessary as a first step to get companies public, but it will not solve the underlying problem of providing research for small cap stocks. The best solution I've seen is the National Research Exchange (NRE) www.ResearchExchange.com.  Founded by Wall Street veteran David Weild IV, the NRE is working on ways to pay for ongoing research coverage. The basic idea is to carve out a portion of the 7% underwriting fee and put it into an escrow account to pay for research over the first two or three years.  The pool could be used to attract research from firms outside of the main underwriting group.  If an analyst left an investment bank and coverage was dropped, the remaining money in escrow could be used to find another firm to cover the stock.  There would be no promise on recommendation, to avoid the obvious potential conflict.  While NRE is still in process of structuring and rolling out the service, I like the idea of effectively guaranteeing coverage by spreading out the economics.