Note: The Skinny blog is written by Rick Smith, editor and co-founder of WRAL Tech Wire and business editor of WRAL.com.
RESEARCH TRIANGLE PARK, N.C. – Venture capitalists are a lot like lawyers: you love them or you hate them. There may not be as many VC jokes as dry, cutting humor as about attorneys, but the term “vulture capitalists” is not rare among entrepreneurs who are struggling to find investors for their new or growing startups.
They certainly don’t need “walking dead” VCs – those who are still in business but not making deals.
Jokes and hard feelings aside, there should be little gloating about a new survey that finds the lack of IPOs – initial public offerings of stock – is perceived as a global threat to the future of the VC industry itself. VCs like entrepreneurs need profitable “exists” so they can cash out and make money through IPOs, mergers or acquisitions. The profits also help them make more deals.
The number of VC firms already is plunging. Ernst & Young reported last October that the number of “active” VC firms dived 47 percent in the first half of 2010. “Active” means they made at least one deal. Many others are “walking dead,” Bloomberg news reported recently.
“More than 80 percent of global venture capitalists surveyed stated that current IPO activity levels in their home countries are too low,” the National Venture Capital Association and Deloitte report about their latest annual survey that was released Wednesday. The VCs stress that “high returns generated from IPOs are critical in providing superior returns to limited partners and growth capital to developing portfolio companies.”
In the U.S., 91 percent of the VCs surveyed said an “active IPO market” was essential for their success. The state of the market right now is too low to support the “health” of the VC industry according to 87 percent of the VCs. Only 13 percent see the market as adequate. Only in Germany is dissatisfaction higher at 92 percent.
Returns on VC investments improved in 2010, according to an NVCA report issued in May. But the trade group and Cambridge Associates, which calculated the data, both stressed the need for a good year in IPOs through 2011 as well as M&A activity to bolster VC profitability. “The increase in returns marks a continued trend in which the improved exit markets and more favorable portfolio valuations are positively impacting venture performance for the first time since the recession of 2008,” they said.
2011 has been OK – so far
Thus far, 2011 has been a decent one for VCs in terms of money raising and deal making, First-quarter venture investing in Triangle was up from a year ago and surged nationally 14 percent to $5.9 billion. Fund raising rose sharply to more than $7 billion. Second quarter data won’t be out until mid-July.
At least 2011 has been a relatively good year for IPOs as well, with LinkedIn, Groupon and a few others cashing in on a revived appetite for Internet-related stocks on Wall Street. 2009 was a disaster, and 2010 wasn’t much better.
Cary-based SciQuest, which pulled off its IPO last fall, certainly has repaid Intersouth Partners in Durham quite well for that VC firm’s financial support in taking the company private and then back to the public markets.
Tranzyme, meanwhile, went public in April but Aldagen had to pull back on its IPO plans.
IPOs remain the exception, not the rule as they were in the pre-“dot com” and telecom bust of 2001-2002. The global financial crisis and recession of 2007-2008 (and in the view of a growing number of people a “double dip” recession) hammered the tech and biotech sectors just as it did virtually every sector of the economy. The Dow is at 12,000, but the jobs situation is awful. Companies like Cisco and Duke Energy are sitting on more than a trillion dollars overseas as they lobby for tax law changes before bringing the bucks home to hire more, invest more, and growth their businesses.
Marc Heesen, president of the NVA, said of the survey: “The recovery of the IPO market, both here in the U.S. and abroad, is not a nicety but a necessity for the future health of the global economy.”
“Deal flow” apparently not the problem
So what is needed to revive the IPO exit route?
Apparently “deal flow” – the new business plans, the new companies looking for funding – isn’t a major concern.
Asked to cite their top three factors for a “healthy” IPO market, answers included:
• 81 percent in the U.S. cited a healthy investor appetite for equity in public companies (Brazil, France, Germany and India were all higher than that number)
• 52 percent stress economic stability (Brazil, China, India, UK were higher in this category)
• 33 percent want “adequate” stock analyst coverage (Canada, France percentages were higher)
• 30 percent want easier reporting for newly public companies (no other country was higher than that – remember Sarbanes-Oxley legislation?)
• 30 percent want a competitive investment banking community for IPOs (Brazil, Germany, Israel were higher)
For more about the survey, read here.
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