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Friday, December 19, 2008
Looking ahead: Sector by sector surveys of the landscape ahead
VCs, angel investors: IPOs may be frozen until 2011
By Galen Moore
MHT managing editor Rodney Brown on NECN: 22 tech companies give back to community
How is the economic crisis affecting tech companies?
There will be no thaw until 2011 — that’s what some conservative pundits are saying about the frozen market for initial offerings of public stock. Meanwhile, the mergers and acquisitions market looks more like a flea market. On Wednesday, a national survey of VCs said 72 percent expect no market for IPOs until 2010 or beyond.
Castile Ventures partner Skip Besthoff said the Waltham venture firm is not investing in new companies that can’t plan to survive at least 24 months without seeking a second round. And Hub Angels Investment Group LLC founder and director Charlie Cameron is advising startup CEOs that are facing staff cuts to consider a voluntary pay cut instead.
A host of regional startups have been near exit-ready since before the downturn. Those companies now face an indefinite waiting period.
In June, 5-year-old open-source software maker Black Duck Software Inc. instituted a “spend smart” program that limited spending to three purposes, said CFO Kenneth Goldman: to do the right thing by customers; to bring in new business; or to do the right thing by employees.
“If there’s a requested expenditure that doesn’t fall into one of those three categories, chances are it doesn’t get funded,” Goldman said. “We’re just being a lot more deliberate about each dollar we spend.”
Lexington-based Gomez Inc. filed notice with the federal government in May of its plans for an $80.5 million IPO, expecting its mandatory quiet period to last about nine months. Now the site performance monitoring company is stuck in limbo, which CEO Jaime Ellertson says may not be such a bad thing.
“As we continue to grow, it’s pretty healthy for us to be in the mode of acting like a public company, reporting like a public company,” he said. In the first six months of 2008, Gomez reported a net loss of $868,000 on revenue of $21.2 million, according to its latest public filing.
Some companies turned down M&A offers before the September crash thinking 2009 would see an improvement, said M&A banker Peter Falvey, managing director of Boston-based Revolution Partners — which itself was acquired by investment management firm Morgan Keegan & Co. Inc. earlier this month. Now, with a freeze that could last a year or more, plus one or two years to rebuild business momentum, some investors face no exit until 2011, Falvey said. “Once you’re talking about time frames that long, people start thinking about selling.”
Not every company will make it to a successful exit, acknowledged Andrey Zarur, a partner at Waltham’s Kodiak Venture Partners — but that doesn’t necessarily spell disaster for VCs. Even in good times, startups fail, he said.
In a downturn, healthy companies’ gains may offset losses within a portfolio, added Kodiak founding partner Dave Furneaux.
“You have to cut costs and then that puts you in a position to take advantage of the situation that’s around you,” Zarur said. “Whenever this is over, instead of having one of the leaders, we have the dominant company in a space.”
However, venture capitalists are in trouble if all they know how to do is price up a Series B and expect good returns, Zarur said. “Venture as usual doesn’t work in a downturn,” he said.
Exit strategies
Executives and VCs offered up their thoughts on exit strategies and IPOs over the next couple of years.
“Our (M&A) pipeline is actually pretty strong. We probably have at least eight companies nationally that have some sort of letters of intent on the table.”
Peter Falvey, Managing director, Revolution Partners
“I’m employing fewer people than I would have because of the lack of access to public markets. It’s not just raising money, it’s investing it and turning it into more profits and happily employing more people.”
Russ Wilcox, CEO, E Ink Corp.
“The horse has left the barn and gone down the path. There’s no viable IPO market until they clean up the stupid Sarbanes-Oxley (reporting requirements).”
Robert Crowley, President, Massachusetts Technology Development Corp.
“What corporate M&As are thinking about is, ‘Let’s go to the bargain rack and see what’s there.’ You will see bottom-fisher type of activity among strategics and among financial investors as well.”
Skip Besthoff, partner, Castile Ventures
“We’re seeing deals be done. They’re fewer, they’re taking longer, and the multiples are down. Six (times earnings) is the new 10.”
Charlie Cameron, founder and director, Hub Angels Investment Group LLC
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