Business Trends

Liquidity Markets Show Signs of Life as U.S. Venture-Backed IPOs Raise Most Capital Since 2007; M&As Remain Scarce

In Uncategorized on October 1, 2009 at 5:05 pm

The third quarter proved to be a mixed bag for U.S. venture capitalists as capital raised via initial public offerings (IPOs) hit the highest level since 2007, but mergers and acquisitions (M&As) of venture-backed companies totaled 71, consistent with pre-boom numbers of 1999, according to leading industry tracker Dow Jones VentureSource. Overall, venture-backed liquidity is down 49% from $5.32 billion in the third quarter of 2008 to $2.70 billion in the most recent quarter.

“While we’re not seeing 2007’s double-digit totals, the liquidity market for U.S. venture-backed companies is showing signs of a significant thaw,” Jessica Canning, director of global research for Dow Jones VentureSource said. “The trickle of venture-backed IPOs over the past two quarters appears to be growing into a steady stream, which is a welcome sign of recovery for investors.”

Scott Austin, editor of Dow Jones VentureWire, a prominent industry newsletter, said: “There are certainly hints of optimism. Public investors are taking chances on IPOs again and corporate acquirers are shopping for promising start-ups in select industries. But the reality is that 2009 will remain a slow year for venture exits overall. Based on conversations with industry insiders, I’d expect to continue seeing massive consolidation in certain sectors and a high level of asset sales. Most venture investors are looking to 2010 for a rebound.”

The $451.25 million venture-backed companies generated through two IPOs in the third quarter is largely thanks to A123 Systems garnering $371.25 million in a late September IPO.

M&A Market Still Soft, Despite Low Prices

According to VentureSource, M&As raised $2.25 billion in the third quarter of 2009 through the sale of 71 companies, down 56% from the $5.16 billion raised in the same period last year. The $22 million median amount paid for a venture-backed company in the most recent quarter is a 52% drop from the $46 million median paid during the same period in 2008.

“While it appears that the market is still holding back despite lower valuations, an upswing in M&A activity is on the horizon,” said Ms. Canning. “We will see an influx of more than $1 billion if Amazon.com’s purchase of Zappos and CA’s purchase of NetQoS close as planned in the fourth quarter.”

Less Money, More Time Needed To Achieve Liquidity

In the third quarter, companies raised a median of $16.50 million in venture capital before achieving liquidity through a merger or acquisition. This is 21% less than the $20.85 million median seen during the same period last year. In addition, it took a median of 6.13 years, 23% more time than the 5-year median in the third quarter of 2008 for a venture-backed company to reach liquidity via a merger or acquisition.

The largest M&As of the quarter belonged to the tech industry with VMware purchasing SpringSource, a provider of enterprise Java infrastructure software, for $362 million and Intuit paying $170 million for PayCycle, a provider of online self-service payroll for small businesses.

In addition to the A123 Systems IPO, LogMeIn, a Woburn, Mass.-based provider of on-demand remote connectivity solutions for the enterprise, completed an $80 million public offering in July.

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