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RESEARCH TRIANGLE … More venture-backed companies sold at valuations four to 10 times the venture capital invested in them in the first half of 2004, a report released yesterday by the National Venture Capital Association (NVCA) and Thompson Venture Economics says.

A total of 86 venture-backed companies were acquired in the second quarter, up from 77 in the first quarter. But the crucial number shows that valuations of acquired companies are trending upwards, says John Taylor, NVCA vice president of research.

Valuations of acquired companies averaged $94 million, up from $88.6 million the previous quarter. “We are seeing more fairly high return exits,” Taylor tells Local Tech Wire.

Mitch Mumma of Intersouth Partners, the Triangle’s oldest and largest venture fund management group, agrees. “Company valuations are a little higher than they have been,” he says but adds: “Even if they sell for $100 million, they may have more than that invested in them.

“The number of acquisitions has been fairly constant the last several years, but so many were fire sales or bottom feeding it drove down sales prices. Hopefully, most of those have worked through the system,” Mumma adds then notes quickly “there will still be some.”

Mumma notes that nationally, 80 percent of venture-backed companies exit via mergers and acquisitions.

“You have to look at the ones that make four to 10 times the amount invested.” That, Mumma points out, means the venture backers “are making money.”

Winners on the rise

According to the NVCA-Thompson report, 19 transactions, or 36 percent, were four to 10 times venture investment in the acquired company in the first half of 2004, compared with only six, or 14 percent, in the first half of 2003. Also, in the first six months of 2004, 14 deals exceeded 10 times total venture investment, compared with only one in the first half of 2003.

The report says 32 percent of acquired companies sold for values lower than the total invested in them in 2004, down from 37 percent in 2003.

Mumma says Intersouth made money on both its portfolio exits this year, SmartPath and Pittsburgh-based Neolinear. “Both sold for cash at pretty good valuations.”

Valuations of 48 reporting companies in the second quarter totaled $4.5 billion, compared with 44 companies disclosing a total value of $3.9 billion the first quarter, the NVCA-Thompson report says.

Mark Heesen, NVCA president, says in a statement, “the average value of a deal in the first half of 2004 is almost 50 percent higher than all of 2003,” and calls it “a positive trend that suggests we are moving towards healthier exits.”

Taylor adds, “Less than happy exits are expected, but the fact that we’ve shifted from underwater exits to strong exits is important.”

Software sector lags

The report says that while the software sector closed the most deals — 25 worth $791 million — only one of the top five deals ranked among the quarter’s top 10. That was Brightmail’s acquisition by Symantec for $370 million, fourth largest deal of the quarter. The total value of software acquisitions dropped significantly from the first quarter, which saw 24 companies acquired at $1.35 billion in transaction values reported.

Media-related and industrial companies “continue to dwarf the values of the new economy software and other IT related deals,” the report says. “The fact that the software sector represented the largest group of deals but prices below the overall average may indicate heightened market appetite for other sectors right now,” it concludes.

Taylor says that statistics may be misleading. “Software overall continues to be a strong sector for the industry. Maybe the spotlight has moved away from it for now. Many information technology companies have had a difficult time. Those created in 1999 or 2000 had to wait for IT markets to open and companies to purchase gear again.

“Now that the IT purchase rate is picking up, they may wait until they have a track record of sales and profits. We may not see anything from them for years. Right now they’re just starting to get traction.”

Mumma says acquiring companies want their acquisitions to add to the earnings bottom line, but that’s good for the companies being acquired as well. “When you cross that line to profitability, the valuation really changes,” he says. “Getting not only revenue, but also profitable has the added effect that more than one acquirer will be interested.”

Mumma says Intersouth has consistently averaged about two deals a quarter since it raised its latest $205 million fund in the second quarter of 2003. “We’ve closed on 10 deals, a good pace for us,” he says. He notes that while Intersouth doesn’t have any current deals “on the edge of closing, it doesn’t mean we won’t get any done soon because we have a number in the pipeline.”

NVCA: www.nvca.org
Intersouth Partners: www.intersouth.com
Thompson Financial Venture Economics: www.ventureeconomics.com