Venture Capital Not Insulated from Broader Market Turmoil

Investors opening up their 401K statements for the first quarter of 2008 will probably need a large supply of Pepto-Bismol to assuage their pain with the Dow Jones Industrials offer more than -500 points. A rally on the first day of the second quarter was quickly dispatched by Fed Chairman Ben Bernanke's sick April Fool's joke that the economy could very possibly contract in the first half of 2008 sending stocks tumbling.



While at first glance, the Venture Capital industry should be insulated from the broader market and economy, new data out from the National Venture Capital Association and Thomson Financial indicates that may not be the case.

Short Line @ Exit Sign

The NVCA provided data on Venture Backed Exits in the First Quarter of 2008. In short, this is a count and measure of the magnitude of liquidity events - Mergers & Acquisitions (M&A), Initial Public Offerings (IPO) - by companies that were previously financed through venture capital funds.

The number of M&A deals was down -31% to 56 deals, from the first quarter of 2007, and even more significantly when compared with the Q1 2006. The value of those deals was down -45% to $2.491 B.

Further, the data reveals that 38% of the M&A transactions valued the venture-backed startups at less than the initial VC investment.



Even starker is the IPO trend. In Q1 2006, Venture Backed companies accounted for 18 IPO's with a combined value of $2.2B, and an average of $121.7 million. In the first quarter of 2008, those numbers were 5 deals for $282 million, and an average deal of $56 million.

According to the Wall Street Journal & Dealogic (registration required):

There were fewer IPOs in the first three months of 2008 than in last year's first quarter in every major region of the world. Globally, the number of IPOs fell 60% to 100 deals and the amount raised slid 10% to $35.9 billion, according to data from Dealogic. In terms of the number of new offerings, it was the worst period world-wide since the third quarter of 2003, by Dealogic's count.

Now, the IPO market is typically very sensitive to the overall trend in the market, and venture capitalists, entrepreneurs and investment bankers alike will often postpone an initial public offering when the market is going through a correction. IPO's are meant to allow founders and VC's to take some money off the table as well as create a publicly valued currency that allows the company to engage in some of its own M&A activity. However, the magnitude of the slide is significant, and if you strip out the Visa IPO, everything looks a bit less rosy.



Plenty of $$$ for Now, Financing is NOT the End Game

While the exit picture isn't so rosy, plenty of money is still out there, particularly if you call yourself an Open Source technology company. Further, VC's are so desperate for deal flow that in some instances, they are willing to buy out the owners personal stakes according to the founder of thefunded.

It is important for entrepreneurs to manage their burn rates and work to produce revenues quickly, though, because this funding could easily dry up. Smaller deal size could be a leading indicator for a slowdown in the supply of funding, especially in light of falling confidence among VC's, according to Silicon Valley Venture Capitalist Confidence Index.