One of the major publications that follow the venture market, PEhub, recently published their recap of '08. As expected, the numbers were not pretty with:
M&A deal value was down 54% to $23B, representing 325 venture-backed transactions (down 29%).
The median consideration amount was down nearly 50% to $45mm; something to think about when these acquired firms raised a median $22.6mm
Seven IPO's generated a scant $551mm in liquidity.
Significantly, it took a median 6.5 years for a Company to reach liquidity via M&A and 8.3 years for an IPO.
No doubt these numbers were skewed by the financial downturn but I also sense something more significant that portends short-term bad news, and longer-term good news is happening, at least in the software and internet sector.
First the bad news.
Many of the investments in consumer facing applications that are dependent upon advertising dollars to support their businesses will be in for far tougher times than anticipated. The combination of a steep downturn in CPC and PPC rates, coupled with rising inventories will leave their backers with an unenviable choice of putting more capital to work in troubled companies (hoping for a short-term market rebound), or withdrawing support and allocating funds towards new investments or supporting the firms with positive momentum. While this Darwinian process is expected, and encouraged, in the venture business, it's happening earlier in the company life cycle than anticipated.
Investments in companies selling to the SMB's and Enterprise arenas are also seeing slower revenue momentum than anticipated, but all indications are that business spending is not as impacted as much as advertising budgets. The issue in this arena is crafting a value proposition that is so compelling that it overcomes the steepening conservatism seen in the early days of a recession.
The bigger market issue, in my mind, is that the dearth of IPO's has left the software and internet arenas with a large imbalance between the number of sellers (large increase) and the count of willing and able buyers (steady decrease). As a consequence, unless there is a rapid pruning of investments, I expect the 'time to liquidity' metrics to worsen over the next few years as many companies, lacking the growth story for a positive IPO, and having raised too much capital to show a positive liquidity event (but respectable businesses who have reached a critical mass to be self-sustaining), continue on their private path.
The good news is that these numbers do not reflect the intense move towards capital efficiency that many entrepreneurs, and their venture backers, have been preaching over the past 3 years. Harnessing instant information from the internet to optimize sales and marketing, and running their businesses based on 'just in time' infrastructure creates situations where less capital translates into better businesses that are equipped to pass these efficiencies onto their customers. Thereby, creating greater opportunities for all stakeholders.
Venture firms, which were formed in the past 5 years, seem to have the DNA to focus on these trends. In the NY area, we see firms such as First Round Capital and Union Square Ventures to be two examples of firms that vigorously practice the capital efficiency mantra; while focusing on high growth market opportunities. It is still premature to label these firms as institutions with the foresight of Kleiner or Accel; but their investing and portfolio maintenance styles bear watching.