Connecticut Venture Group chose the name Crossroads for its annual venture capital fair to describe the Stamford event”™s geographical location at the junction of New York and New England.
With financiers hitting a wall on getting returns from the companies in which they invest, the industry has reached a chronological crossroads as well, and it”™s not a good one.
As entrepreneurs and capitalists gather in Stamford April 29 and 30 for the Crossroads Venture Fair, a new report by Thomson Financial and the National Venture Capital Association (NVCA) shows decade-low “exits” for venture capitalists in the companies they back, whether through an acquisition or an initial public offering of stock.
The new data follow a record-breaking year in which venture capitalists raised $29.4 billion nationally, according to Stamford-based Thomson, NVCA and PricewaterhouseCoopers, which in turn helped spark raising $34.7 billion in new capital. Venture capital firms raised $5 billion in the first quarter, according to a separate report by Dow Jones Private Equity Analyst.
Just 56 companies nationally funded by venture capitalists were acquired in the first quarter, however, the lowest level since 1999. Only five venture-backed companies held an initial public offering of stock, the lowest number since 2003. Just 37 companies are on file for an IPO, down from 60 in the fourth quarter.
In New England, no venture-backed company held an IPO and just a handful in the region reported an acquisition.
Companies had ample reason to be leery ”“ fewer than a third of the companies that have held an IPO in the past year are trading above their offering price.
“We believe the slowdown is likely due to economic uncertainty,” said Emily Mendell, vice president of strategic affairs for the National Venture Capital Association. “The decision-making process for large companies to buy smaller startups is likely a bit longer than it has been in the past. We don”™t think that companies are being low-balled and turning down offers. The quality of the acquisitions that have gotten done is being upheld.”
Many of the companies seeking funding at the Crossroads event will require years to develop their products or services, but others will seek relatively late-stage funding that could set them up for a deal.
Marking its 15th anniversary this year, companies showcased in the Crossroads Venture Fair have raised $2 billion in funding, according to Crossroads chairman Tom Freed, an attorney in the Stamford office of Edwards, Angell Palmer & Dodge L.L.P.
If there is a silver lining to the current market stagnation, it is that private equity funds appear to have stepped back from aggressively seeking acquisitions, making it easier for operating companies to do deals to bolster their product or service portfolio.
“It has been very busy when the acquirer is a company acquiring (others) out of their existing cash flow,” Freed said. “Operating companies are no longer being driven crazy by the private-equity guys.”
For now, many observers are taking a wait-and-see attitude as the full impact of the credit crisis washes through the economy.
“It”™s hard to predict how this will go,” Mendell said. “This downturn is not like the tech bubble burst. But we do need some strong IPOs to go out and perform well to improve investor confidence. We also need to see an increase in registrations.”
