To get a quick snapshot of the venture capital sector right now, check out “Business Exits in the Current Economic Environment.” It’s a summary of a panel discussion sponsored recently by the Wharton Entrepreneurial Program.
Wharton management professor Raphael (Raffi) Amit highlighted the major shifts in the sector. No surprise in the steep decline in the number of IPOs by venture-backed companies in the U.S. The number of IPOs plummeted from 260 in 2000 to 13 in 2009, and VC-backed M&A transactions dropped to 260 deals worth $12 billion (as compared to 462 deals worth $99 billion in 1999). Amit also said that investors have reduced their commitment to the industry, from $41 billion in 2007 to $15 billion in 2009 in the U.S.
This crash has been deeper, broader, and much more global than the dot.com debacle of 2000 to 2003, according to Frank Quattrone, co-founder and CEO of Qatalyst Partners, a technology-focused investment bank in San Francisco. And the near-disappearance of credit is putting a further damper on IPOs, particularly for mid-size and smaller cap start-ups. “It’s going to take a longer time to come back…. We’re going to need to get the credit flowing in the economy again before things really open up,” Quattrone said.
The playing field among banks has changed dramatically, too. In the 1980s and 1990s, big investment banks such as Morgan Stanley and Goldman Sachs handled between 5% and 10% of the key technology IPOs. The remainder, including what turned out to be high-profile IPOs for firms such as Sun Microsystems and Adobe, was handled by smaller boutique firms.
“Today, it seems like the feeling is if Morgan and Goldman won’t take your company public, it’s not worth it. It’s like saying, if you can’t get your kids into Wharton or Stanford, they might as well work in the coal mines,” said Quattrone.
What do you think? Is the VC industry “broken” or on the mend? Add your comments below.
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I recently spoke to the Chief Investment Officer of one of the largest university endowments. He told me that they would like to invest in Venture Capital, but that they would like to see a new model. Previous to 2008, they hadn’t realized the value of liquidity and the liability of having committed capital. They also talked about an interest in seeing funds’ carry being based on beating a benchmark and not returns.
Thanks, Peter. We have relationships with some top universities and have heard the pressures they are under due to the value of endowments falling apart in recent years. Universities have huge capital invested in alternative investments and they are a big part of the force driving necessary changes in the market.
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