Venture-Backed Liquidity Continues to Plunge
Bill Warner Thursday, July 02, 2009
Venture-backed liquidity continues its plunge that started in 1Q08. It’s now down to $2.8 billion, a 57% drop since this time last year, and down from $18.4 billion in 4Q07. The number of venture-backed IPO transactions continues to be anemic with three so far this year, versus seven for all of last year. M&A is also down to 67 deals totaling $2.6 billion, down from $16.2 billion in 4Q07 and a drop of 23 percent since last quarter. See all the data at VentureSource.
Venture’s life blood continuing to be squeezed
As you know, these two types of transactions are the life blood of liquidity for venture capital firms. With so few transactions, venture firms are feeling the pain with no viable way to exit from their portfolio companies. Their entire business model is built with the assumption that there will be a sizable exit. Of course, very few of their investments achieve this goal, but they are supposed to more than offset the lower performance or losses experienced in the rest of their portfolio. With M&A’s and IPO’s continuing their decline, venture capital firms are faced with not being able to meet their commitments to their limited partners.
The fallout continues
Unfortunately, there are also an increasing number of venture capital firms backing away from the market in the face of these realities. You have read about the optimism of the National Venture Capital Association’s initiatives to find new venture capital business models and several venture capital firms experimenting with new markets as well as smaller investments with small expectations for returns. These are far too late for many firms, especially those that need to raise new funds. We will continue to see the fallout through the remainder of the year.
What is the future of venture capital
With the continued anti-business and anti-venture capital regulation by the federal government, it is hard to imagine how the current venture capital market will survive. We are more likely to see a continued weeding out of the weakest firms as others redefine themselves with business models that are much more modest with respect to amount invested per company, expected returns and time to exit. Models like this are being tried as some firms actually are dipping down to take on some pure start-ups. Others are playing in the debt markets which would be an entirely different model for achieving returns to their limited partners.
What about entrepreneurs
As for entrepreneurs, you have to analyze the viability of any venture firm that you approach by taking a hard look at the value of their current portfolio and where they stand with their current fund. You want to determine if they are going to be able to be with you in subsequent rounds and whether or not their key personnel will be there to assist you. A lot of hard questions need to be asked about their business model so that you can satisfy yourself that they will be a long lasting partner or not.
They will certainly offer low valuations and strict terms, but the negotiation is a two way street. Make sure they are really going to be worth what they claim to be.
Filed Under: Angel Investment, Financing a Company, Managing Business Financials, Starting a Business
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
