Today I had some time to explore what the economic downturn means for venture capital investors. The result: no new IPOs and lower M&A exit numbers (source: NVCA reports).

  • No IPO activity for two consecutive quarters (first time on record)
  • 56 M&A exits in Q1 2009; 13 totaled $645MM – in that last 3 years that number has been closer to 100 M&A exits; average value of $49.6MM / exit
  • Due to the lackluster IPO market, corporate acquirers are being more selective and taking their time when considering acquisitions
  • IT sector led the venture-backed M&A market with 42 deals and total value of $348MM

The NVCA also stated that 40 venture firms raised $4.3B in Q1 2009. This happens to be the smallest number of venture funds raising money in a single quarter since Q3 2003.

How are venture firms adapting to the downturn?
VCs are saving funds to support existing portfolio companies that may be experiencing lower sales volumes, or cash flow issues due to problems with accounts receivable or inventory. In addition, VCs are taking more time to support portfolio companies from an operational perspective; it’s a good time to trim the fat, get lean, and bring in some very experienced talent that can now be found readily on the street.

In light of poor IPO and M&A markets, valuations have been pushed down significantly. Companies are once again being evaluated on revenues and other real metrics. There are still many over-inflated venture-backed companies out there and many VCs are waiting for valuations (or valuation expectations) to decrease before injecting cash. It is becoming more of a VCs market to demand their price.

One more thing — since many VCs have closed their doors to new investments, existing VCs can be more selective in the investments they would like to pursue. This increase in stringency will hopefully result in more winners being picked during these trying months.

Bob Mast, who is the Managing Director at Monument Group thinks “the world is divided into 3 groups: people with severe cash flow problems that have halted commitments, people who are over their target and are being very selective, and people who have money but are still nervous.”

Like many others out there, I am hoping for a turnaround and markets to reignite very soon. Until then, I’ll be keeping my head down and trying to pick winners.

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