The downturn in the financial markets has another victim – exits are way down for venture backed companies.
Dow Jones VentureSource reported Tuesday that mergers and acquisitions activity and initial public offerings for venture-backed companies are on pace to close out the year at their lowest level in the past ten years. Only one company went public in the third quarter, compared to 11 in the third quarter last year, and there were only 247 acquisitions of venture backed companies in the first nine months of 2008, down 25% from the 327 acquired in the first three quarters of 2007. In just the third quarter, there were only 66 mergers or acquisitions, down 45% from the 116 deals in the quarter from one year ago. These deals are typically structured as asset purchase agreements or stock purchase agreements.
I’ve written about potential upticks in strategic merger activity separately as the lack of cheap debt was forcing private equity to the sidelines, but it appears that this is not the case. We’ll have to wait and see what happens.
One thing is sure, though. As exits continue to be tougher to achieve, and as they take an average of nearly nine years to achieve instead of the 5-6 we saw in the late 1990s, it’s likely that deals will be tougher to get and deal terms are likely to change as venture capital investors look for alternative mechanisms to liquidity. And if you need money right now, watch out. In our board meeting with our venture investors last week, it was clear that a large number of entrepreneurial firms were going to fail in the next several months due to a lack of funding more than any other cause. That’s tough to hear, because frequently the VC-funded model is to spend to buy growth as aggressively as possible, with the explicit objective to do another funding round after certain milestones are achieved. Funding risk has always been there, but with the chair pulled out from a lot of companies that followed this model, lots of jobs are going to be lost.
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