The IPO is back(2)

With fundraising down and exits up in the first quarter of 2007, US venture capital is continuing on the tail end of its current cycle. But as the NVCA’s Mark Heesen points out, the quarter’s results shows a subtle change in the psychology of the market. Dave Keating reports.

As numbers are in for the first quarter of 2007, and the figures continues to reflect the current cycle of venture capital investing. New data released this week by Dow Jones Private Equity Analyst shows that US venture capital fundraising fell during the last quarter compared to the year before. Twenty two VC funds raised $3.8 billion, down from $4.4 billion in the first quarter of 2006.

This is not surprising, considering most VCs are now concentrating on giving away the money they’ve raised and exiting investments. This point in the cycle was illustrated in a recent report by the National Venture Capital Association and Thomson Financial, showing that IPOs saw a significant increase during the last quarter. Seventeen venture-backed companies raised $2.09 billion through IPOs on US exchanges during the quarter, a massive 70 percent increase from the first quarter of 2006, when ten venture-backed companies went public.

Large corporations have slowed their acquisition pace, likely because of stock market uncertainty and earnings pressure. This all means fewer, but higher quality acquisitions.

Mark Heesen, NVCA

What is perhaps more interesting is that at the same time M&A activity fell significantly, with only 62 transactions completed this quarter compared to 104 in the first quarter of 2006. This drop was mitigated, however, by the large average deal size of the quarter at $167.2 million, one of the highest quarters in the last five years.

“This quarter may mark a subtle shift in the exit mix for venture capital,” says NVCA president Mark Heesen. “There appears to be a crack in the IPO window, which changes the psychology of the market. In recent quarters, an IPO has not been a viable option for most of these companies. However, the increase in venture-backed IPO registrations is an encouraging sign.”

“At the same time, large corporations have slowed their acquisition pace, likely because of stock market uncertainty and earnings pressure. This all means fewer, but higher quality acquisitions,” he says.

The increase in IPO activity is also not showing any signs of a return to the dotcom boom. Even with all the hype over the “web 2.0” boom, these companies didn’t account for even one of the IPOs this quarter. While the technology sector did make up the bulk of the activity, with nine IPOs comprising 67 percent of the total, these were less sexy companies selling equipment or wireless services. The total for the sector was particularly boosted by Washington-based wireless internet provider Clearwire Corporation, which had the largest venture-backed IPO since October 2004 when it listed 12 million shares on NASDAQ at $25 per share.

The performance of those companies that have exited through an IPO recently should give investors a certain degree of confidence. Of the venture-backed companies that went public during the rolling twelve month period, 70 percent are trading at or above their offering price, according to the NVCA.