InsideVenture CEO Hopeful Liquidity Events Will Return
No foolin’, the exit markets for VC-backed companies are bad.
Thomson Reuters and the National Venture Capital Association released exit numbers today, which you can view here. In the face of an economic downturn, there were zero venture-backed IPOs in the first quarter of 2009, marking the second consecutive quarter in which there were no new issues. Again, this is not an April Fools’ Day prank. There has never before been any record of back-to-back quarters of no venture-backed IPOs.
In addition, M&As were also lousy. Only 56 transactions were recorded the last three months of VC-backed companies, 13 of which had disclosed volumes, totaling a combined $654.3 million. By the way, Cisco’ announced purchase last month of Pure Digital for $590 million is not part of the tally. That deal is not yet finalized
However, Mona DeFrawi, CEO of InsideVenture, is confident that liquidity events will return. The exits may not come in the form of an IPO, but liquidity, through late stage financing, for example, will happen, she says.
What gives DeFrawi hopes is that last week, her Menlo Park, Calif.-based organization held a conference in Santa Barbara in which 50 late stage private companies presented to a mix of institutional buyers that included PE firms, late stage venture investors and other financial institutions. The idea is to get the buyers to invest in the companies, which otherwise might go IPO. But no one’s going public these days.
DeFrawi says that in the week following the conference, she knows of 10 companies that are actively in negotiations to raise late stage financing. Two of them are “extraordinarily likely” to raise cash. One is on tap to raise $40 million and the other is looking to raise $50 million.
“There are a lot of great opportunities out there, and we’re starting to see movement in the market,” she says.
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greg bohlen said on April 2, 2009
That was the best private equity conference I have ever been to. Quality of the companies there was off the charts and other investors I spoke with agreed. The headline of “Venture is dead” was certainly off the mark if you spent any time in the one on ones. The community is building some great companies that very few are aware of. If the public won’t buy, all the better to build some great value in high growth companies for a few investors like us.
Alastair said on April 2, 2009
Greg, thanks for reading, and I’m glad to hear you liked the conference and that it presented such quality. I’m jealous that I didn’t get to go to Santa Barbara. If you’d liked to talk more about the conference and the market for late stage investing, I can be reached at alastair.goldfisher@thomsonreuters.com.
John said on April 2, 2009
Conference was okay, although the number of quality companies outweighed the number of investors, which is not a surprise for a first time conference and especially one that charged investors and companies to attend. There will always be value from a venue that brings companies and investors together. It helps cut down on travel and also can be valuable to find unknown companies as well as investors. One conference is certainly not going to be the answer.
Recommendations on the conference — make it free and have the venture firms pay for the event. I’m not sure this is model that supports an independent company like InsideVenture becoming a conference company and I’m pretty sure that no VC or company is going to give exclusive or transaction fees. The VCs should just create a non-profit organization that throws conference. Or perhaps the National Venture Capital Association. Additionally, the conference should never be in a place like Santa Barbara that is very difficult to get to. Another thing to consider is that many private investors and companies get the opportunity to present at “free” conferences. In the few months before this conference, many great companies presented at Goldman Sachs Internet and Software Conference, TWeisel conference and the Monty conference. All of which had huge numbers of private investors as well as public crossover investors.
Couple of points on your article and considerations:
1. I’m not really sure that the article really addresses the issue with late stage financing. Frankly, there is plenty of capital in the late stage market, but the issue is one of critical mass for the companies to get interest. Then its a question of economics between early investors and the new investor. The real issue is that the public market and M&A pricing has changed combined with these companies taking longer to get to critical mass. There is capital, but the VCs are looking for capital that helps leverage early investment at terms or stages that are riskier than many of the late stage investors want to participate.
2. I agree with Mona that alternatives will exist to IPOs and M&A, but its not how she is describing. I think she is envisioning a type of private exchange. Before the market melt down alot of hedge funds and wealthy families were beginning to enter the market – buyers that are called QIB (Qualified Institutional Buyers). These buyers were investing in private companies b/c they were having issues finding Alpha in the public market. Firms like Morgan Stanley and Goldman were starting to develop private exchanges to create liquidity for these types of investments. While a great idea, the issue now is not that an exchange doesn’t exist, but rather there are not buyers that want to participate on the exchange. These guys will first start to buy the IPOs when they become available – and this will be lead by high quality boutique banks that have a reputation for selling quality product.. Frankly the opportunity for some venture backed companies will be from buyouts from private equity firms. Look to deals like IntraLinks (TA), Network Solutions (GA), Nextag (Providence) and others.
Overall, there is certainly an opportunity to provide innovation in the private market. The key is not to confuse the components. First, you have the ability to make it more efficient which a conference does — InsideVentures is doing the same thing others have. Btw, InsideVentures conference would have been amazing 3 years ago or back in the late 90s when everybody and their brother wanted to do private technology investing. Not so any more. Secondly, but more valuable is bringing new buyers into the market. Which conferences do, but a conference is not going to solve the financial and structural issues that people are looking for less risk at later stages combined with the fact that many VC companies that historically could access later stage capital now don’t meet the definition.
This will all change and evolve. Case in point. Back in 1995 when Netscape was considering going public, the big hurdle and question was the issue of profitability. In those days you need to be profitable or have it in the next quarter. No exceptions for the quality firms. We went from that situation to having 2 firms file for IPOs with ZERO revenue, one by Goldman Sachs and the other by Morgan Stanley (which btw, neither went public…but amazing each of them got on file with the best firms in the industry. Boy that seems like it was a long time ago!!
One of the biggest things to remember is that the successful companies will always/usually have capital available, although with different pricing. We are now suffering an issue that the VC market became so big in terms of early stage investing that they all are not hitting success criteria to continue. Its a macro issue do to the size of the market.