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Boston’s venture capital investors were stuck between a rock and a hard place in the third quarter, as profitable exits remained scarce and new fundraising near impossible.
A rumored thaw in mergers, acquisitions and initial public offerings (IPO) for venture-backed companies proved nothing more than talk for most investors. Numbers released this week show corresponding sluggishness in venture capital firms’ ability to raise money to invest in companies.
Just one Boston-area VC firm, Waltham-based Matrix Partners, successfully closed a new fund in the third quarter, according to data released Thursday by Dow Jones VentureSource. Matrix’s $600 million closing was the second largest among the $3.5 billion in new funds raised by U.S. venture firms in the quarter. The national fundraising amount was down 51 percent from the amount raised in the year-earlier period, according to VentureSource.
Most notably absent were the $300 million-to-$500 million funds that have been the “bread and butter of the venture industry,” said Flybridge Capital Partners General Partner Michael Greeley, who chairs the New England Venture Capital Association. Nationwide, brand-name firms such as Matrix are surviving, as are smaller funds focused on early-stage investment. Early stage investors raised $1.6 billion across 18 funds in the most-recent quarter. Firms raised $2.9 billion via 17 funds in 2008’s corresponding period.
The return to smaller fund sizes and early-stage is an overdue correction, said venture attorney Andrew Updegrove of Gesmer Updegrove LLP. VCs did not learn their lesson after the tech bubble burst in 2000, he said.
Western Massachusetts-based Village Ventures pulled down a $28 million extension from its existing limited partners in September, bringing the firm’s second fund to a total of $130 million. Village Ventures partner Bo Peabody said the extension was in part a product of a tough fundraising environment.
“We had a group of existing (limited partners) that were excited about getting more exposure to the existing portfolio,” he wrote in an e-mail. “That felt like a better move than facing a difficult fundraising environment for a new (fund).”
Greeley expects that difficult environment to continue for most firms.
Clearly (limited partners) are voting with their feet,” Greeley said. “They’re, I think, frankly on a wait-and-see attitude to see if the U.S. venture marketplace regains some of its luster. They want to see predictable, repeatable, exciting liquidity events.”
Such events were few and far between in the third quarter. Nationally, two technology companies — both based in New England — made initial public offerings in the quarter. LogMeIn Inc.’s $107 million IPO and A123 Systems Inc.’s $378 million offering were bright spots in an otherwise dreary New England exit landscape.
Of the region’s seven mergers and acquisitions in the quarter, just two reported financial terms: Kofax’s acquired 170 Systems for $32.9 million, while Integra LifeSciences paid $9.25 million for Innovative Spinal Technologies’ intellectual property assets after the company declared bankruptcy. The high percentage of unreported deals indicates many of the other deals may also have been at fire-sale prices, experts say.
Nationally, 71 venture-backed companies were acquired or merged for a total dollar value of $2.25 billion in the third quarter. That total was less than half the $5.16 billion in M&A exits in 2008’s third quarter.
That may change in the fourth quarter, with the planned $295 million acquisition of Gomez Inc. by Compuware Corp. expected to close in November. Likewise, Amazon.com’s purchase of Zappos and CA’s purchase of NetQoS also are expected to close this quarter with a combined value of around $1 billion.
But for VCs raising funds now, a depressed M&A market has created major problems, Updegrove said.
“The bloodshed is still somewhat underreported,” he said. “There’s still a lot of bad news that VCs are still recovering from. Funds that were started in 1999 or 2000 are getting to the ends of their lives now, and for some of them it’s not pretty.”
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