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Venture is Back, Baby
December 2, 2009
Over the past few weeks we’ve seen extremely high activity in new venture investments. Starting in September, we witnessed the return of multiple term sheet deals, short fuse situations, and a renewed urgency to most fund-raisings. I heard last week of a hot late stage deal attracting ten (yes 10) term sheets. It’s a really great company, but just one quarter ago that number would have been much lower. FastCompany’s Q3
The same VCs who hunkered down in January were back in the game in September, and they were back in force. We call the rise in new investment activity, “back to school investing”, and it represents a significant return to health after the prolonged hiatus that started in Q4 2008 with the infamous “RIP Good times” slide deck.
Venture is back. And it’s back because of one word: exits.
In Barron’s this weekend, Michael Santoli quoted a March 2007 Speech by Fed Reserve governor Kevin Warsh in which he said “Liquidity is confidence.” Exits mean liquidity, and liquidity brings confidence to GPs (and LPs), which spurs investment.
Just as analysts and pundits were decrying the “end of the venture experiment,” 2009 was quietly becoming an extraordinary year for venture exits, both in IPO and M&A form. Early 2009 venture-backed IPOs of OpenTable, SolarWinds, and more recently Ancestry.com (ACOM) and Fortinet (FTNT) have held up in the aftermarket, and more significantly these deals have demonstrated the public market’s desire for growth and comfort with small(er) company risk. There are rumored to be between 50-100 venture-backed companies that plan to file in Q1 2010. Speculation for 2010 IPOs also includes some game-changing companies, most notably Facebook, LinkedIn, and Zynga.
I was recently in group of VCs when someone asked who at the table had a privately held company in their portfolio with over $100mm in annual revenues? All of us raised our hands. I later asked this question of another group of GPs and got a similar show of hands. Even in our young True portfolio, where the median company age is only 2.5 years, the portfolio turned in a strong Q3, generating over $50 million in revenues. Across the valley, there is huge pent
Another reason for optimism is the recent increase in venture-backed M&A activity. We believe this will accelerate dramatically in the coming months because large cap tech currencies are up, layoffs have made these same companies lean and mean, but it’s also made them hungry.
Simply put, November 2009 looks a lot better than November 2008 if you’re a public tech company. Have a look at the 1-year charts for ORCL, MSFT, ADBE, YHOO, GOOG, AAPL to see the market cap’s steady march up to the right. But ‘08 and ‘09 were also times of RIFs and cost cutting. Think back to the headlines from last year of Google
These layoffs have two implications for private company M&A: the first is that by now, most large tech companies have reduced operating expenses dramatically and conserved or generated cash. 2009 was a year of focus, which meant curtailing ambitious new initiatives and reducing R&D spending. These efforts are good to get things cleaned up, but they present a big problem for the future, because big tech needs innovation to grow, and innovation happens fast these days. Many of the most exciting developments in tech are coming from young innovators who are leveraging newer architectures such as web 2.0 and real-time web. Marry those technologies to new distribution channels like Google & Facebook and lower friction sales models like on-demand. New technology, new business models, innovation.
M&A will involve younger companies in the next 12 months, because big tech needs the new stuff, not the old. Electronic Arts buying Playfish for over $400 million, Google’s $750 million purchase of Admob and Intuit buying Mint for $170 million are three recent examples. This should be another good thing for VCs.
Much like the health of the IPO window, the coming M&A Tsunami creates liquidity to the venture business, which will restore confidence in the logic behind the venture capital model. Though admittedly venture takes time, GPs at the “ground level” are seeing this now and acting rationally to deploy capital into this period.
2010 is shaping up to be an extraordinary time for venture capital and by extension, Silicon Valley.
The Praized Blog » Blog Archive » On the Verge of Another Local Media Industry Shift? says:
[...] don’t believe that VC investments are coming back? Read this post written today on the True Ventures corporate blog. Excerpt: “Over the past few weeks we’ve [...]
December 2nd, 2009 at 7:27 pm
Jeff says:
I enjoyed your post. Can you give some other internet/tech potential 2010 IPO’s besides Facebook, LinkedIn, and Zynga?
December 2nd, 2009 at 10:55 pm
Ged Carroll says:
The big challenge in many ways is what innovation would acquirers be eventually buying? When I think of the web space innovation has moved from vertical integration to horizontal integration for many startups. A classic example of this would be Socialmedian acquired by Xing. Jason Goldberg had an idea, had it developed on open platform tools by An Indian contract firm. He has recently left Xing and is currently working on a new project with his Indian partners. Talent the lifeblood of innovation has become as fickle and fluid as capital.
December 5th, 2009 at 9:25 am
insider says:
this is full of sound and fury, signifying nothing.
a bunch of portfolio companies with $100MM revenues? cool!
but the IPO market is a faint shadow of itself. the indystry needs 100-200 successful IPOs per year to make LPs receive above market returns
ditto M&A — the problem isn’t that there is an appetite for acquisitions. the problem is that portfolio companies exit valuations can’t possibly be high enough to generate sufficient returns
ina hutsheel, if the VC industry is investing $30 billion per year then it needs to be harvesting $90 billion per year to create venture returns (that is, to beat plain vanilla liquid investments by a margin sufficiently large to justify huge fees, illiquidity and long long time frames)
and that’s ain’t happening. no way no how
the VC industry needs to shrink by at least 50% before LPs can see success. and also VCs need to reduce management fees.
ping me when hell freezes over
December 5th, 2009 at 5:15 pm
Jon says:
Actually, other than your first line, we’re almost in total agreement. There is no way that the industry generates $90bn in liquidity, the IPO market is far from “fixed”, and the industry is far too large.
My thesis isn’t so much that VC is cured, but that for the first time in a long time, deals are working, IPOs are happening and M&A is happening at high levels. This means that certain funds with certain strategies are working, and LPs are seeing distributions for the first time in 5-10 years. This is not only a notable change, but significant for confidence in the model, which is spurring new deal activity this quarter.
The business is far too big, and strategies far too undisciplined. Smart LPs are chasing the pockets of the business where returns can be had, but to your point, there aren’t $30 billion worth of these pockets.
Venture is, and always has been, a great small business.
December 5th, 2009 at 6:05 pm
Howie’s Venture CASH Fund | Howard Lindzon says:
[...] is back. My friend Jon Callaghan wrote a great piece about the state of Venture Capital . He is bullish and for the right reasons. I was extremely bullish last fall and now too busy to be [...]
December 8th, 2009 at 8:17 am
Howie’s Venture CASH Fund | Stock Trading Alerts and Updates says:
[...] is back. My friend Jon Callaghan wrote a great piece about the state of Venture Capital . He is bullish and for the right reasons. I was extremely bullish last fall and now too busy to be [...]
December 15th, 2009 at 2:03 pm
Shea says:
@Jeff
Here are some other 2009 venture-backed IPOs:
Digital Globe (founded 1993)
Open Table (1998)
Solar Winds (1998)
Rosetta Stone (1992)
LogMeIn (2004)
Medidata (1999)
Cumberland Pharma (1999)
A123 Systems (2001)
December 23rd, 2009 at 1:13 pm
Howie’s Venture CASH Fund « Social Leverage says:
[...] is back. My friend Jon Callaghan wrote a great piece about the state of Venture Capital . He is bullish and for the right reasons. I was extremely bullish last fall and now too busy to be [...]
January 29th, 2010 at 6:49 pm