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MHT's Jackie Noblett: VC funds run short in 2009
Venture capital investors are pushing younger startups out of the nest these days. Driven by pent-up buyers and sellers on both sides of transactions, time to liquidity is shortening in the venture industry, according to analyst reports reviewed by the Boston Business Journal.
The market for acquisitions of U.S. companies will have been worth about $212.6 billion in the first quarter, according to a preliminary report by Dealogic, to be published Friday. That’s a lower number than Q1 2009 — likely because of two mammoth pharma deals that closed during the year-ago period: Pfizer Inc.’s $68 billion merger with Wyeth, and Merck & Co. Inc.’s $41.1 deal for Schering-Plough.
This quarter’s deal announcements included two large Bay State deals, both take-privates — Millipore’s $7.2 billion acquisition by Merck, and Bain Capital’s $1.1 billion grab of Skillsoft. Deals of that magnitude indicate the market is recovering overall, but other factors are at play in the market for small startups with a technological edge, said Peter Falvey, managing director at Revolution Partners, a Boston investment bank that focuses on tech M&As.
Acquisitive giants like Cisco Systems Inc., Hewlett-Packard Co., IBM Corp., Microsoft Corp. and Oracle Corp. were relatively unscathed by the 2008-2009 recession, Falvey said. Now, collectively, they have over $100 billion in cash burning holes in their pockets, he said.
“Some of these big buyers are really like sharks: They need to swim or they die,” Falvey said.
One of the Boston area’s largest venture-backed M&As of the quarter was Woburn sensor maker Nova Analytics Corp., which sold to ITT Corp. (NYSE: ITT) in a $392 million deal that closed Tuesday. It was over a 10-times return for VCs who invested, including the Boston firm Ascent Venture Partners. Ascent Partner Matt Fates said it was the fourth M&A deal the firm has done in the past two quarters, in which the buy side was first to come with an offer.
“They probably felt like now might be a time to be opportunistic. The valuation expectations aren’t going to be sky-high,” he said.
According to numbers from Dow Jones VentureSource, the median time to liquidity dropped in 2009 to five years — its lowest since 2004, when the figure hit 4.6 year, before rising to a recent high of 6.3 years in 2007.
VentureSource Global Research Director Jessica Canning said pent-up supply is another factor pushing venture-backed companies to market. With the return of decent M&A valuations, many VCs are seeking to put up good numbers before going out to fundraise.
That doesn’t necessarily apply for the quick-turnaround venture deals from the Boston area so far in 2010.
.406 Ventures Managing Director Larry Begley exited ChosenSecurity Inc. in February, in a sale to California-based PGP Corp. for undisclosed terms, less than four years after he and other VCs spun it off from GeoTrust Inc. .406 closed its $168 million first fund fairly recently — in 2008.
In January, Highland Capital Partners exited StyleFeeder Inc., in a sale to Time Inc. Highland’s first investment in it was less than five years ago, in 2005.
Highland General Partner Dan Nova said the M&A market is warming up. Highland has exited two companies by M&A in Q1, and is talking to potential buyers for five more.
But, Nova said, “(Q1 2009) was a nuclear winter. Now, we’re just in a record-cold-temperature winter. ... I’m not predicting it’s going to be robust in any way.”
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