Exits on the up and up: VCJ cover story


Two thousand fourteen ended with a pop, and not just from the corks in New Year’s Eve champagne bottles.

A string of well-received late December public offerings capped a strong year for venture funded IPOs and helped cement high hopes for 2015. Lending Club, Hortonworks and New Relic all jumped 40 percent or more on their first day of trading, despite the latter two pricing their stock below its value in late-stage private rounds. Their success gave the year a nice lift.

“Everybody in the venture business would say it has been a very good year,” said Mark Siegel, managing director at Menlo Ventures, referring to the past year’s IPOs and M&A exits.

If interest rates stay low and the economy stays healthy, Siegel said, “I do think it spells more of the same for 2015.

There are many reasons to think the exit environment will stay upbeat. The U.S. economy continues to perk up with consumer spending on the rise, better hiring, low oil prices and strong GDP growth.

Venture companies lining up for IPOs next year are not just plentiful but often have solid fundamentals, with $100 million revenue run rates growing at 30 percent or more, and the potential to rock the foundations of traditional markets, from education to health care to transportation to high tech.

CB Insights estimates as many as 588 venture-backed businesses fall into this bucket with the size and growth to consider going public. Their enthusiasm is reflected in the rising number of confidential registration statements on file with the Securities and Exchange Commission: More than 700 at the end of the third quarter, up from about 500 in March. That’s a pace of more than one new growth company filing each day over the six months.

But there are crosscurrents, too. On the economic front, China’s economy is slowing, Russia and Japan have entered recession, and Europe is a big unanswered question. Terrorism is always a wild card. All of this could shake the conviction of Wall Street traders.

More importantly, domestic interest rates are likely to begin rising, shifting public market attention to such factors as profitability and cash flow and away from growth at all costs.

In this environment, late-stage deal pricing could become a hurdle both to public offerings and M&A transactions, as the experience of Hortonworks and New Relic may have signaled. If high-priced late stage rounds end up underwater, the pace of acquisitions and IPOs could slow, especially in a rising interest rate environment where risk capital becomes more expensive.

In general, 2014’s exit numbers paint a pretty picture. As of mid-December, 119 venture-backed companies went public, the highest number since 2000. Volume was up by one-third from 2013 and more than double 2012’s, according to preliminary data from Thomson Reuters. (The NVCA reported on full-year exit numbers, which can be downloaded on their website.)

While this still doesn’t match the pre-bubble mid-1990s, when 166 deals were done in 1995 alone, it is a step in that direction.

The year was a banner one for life sciences IPOs, particularly biotech. As of mid-December, 77 life sciences deals were done, 65 of them biotech, a huge jump from 2013. Tech IPOs essentially matched 2013.

Aftermarket performance was respectable, as 51 percent of new offerings traded above their offering price as of mid-December, while 47 percent did not. Two deals were unchanged.

Software and IT performance was slightly better than health care. A total of 55 percent of software and IT deals held a premium above their offering price while 51 percent of life sciences deals did. Biotech fared worse. Only 46 percent of deals traded above their asking price.

Perhaps not surprising given the March Nasdaq sell off, deals from the first half of the year performed poorer than those from the second half. Only 43 percent of deals from January through May were trading above their offering price as of mid-December compared to 62 percent for the second half of the year.

Venture-backed M&A turned in a solid, if unspectacular year. Volume was up 10 percent from 2013, but well under the recent peak years of 2010 and 2007, according to data through mid-December from Thomson Reuters. IT deals made up more than three-quarters of transactions.

Many venture investors expect improvements in 2015 in both IPOs and M&A, or at least more of the same.

This story first appeared in affiliate magazine Venture Capital Journal, which is published by Buyouts Insider. Subscribers can read the full story and the accompanying tables by clicking here. To subscribe to VCJ, click here for the Marketplace.

Photo illustration from Shutterstock.

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