The Patriot Ledger
Venture capital activity is showing signs of life after a precipitous three-year decline.
Industry researchers say the number of deals and their dollar values are on the upswing, although activity is still a far cry from the industry peak in 2000.
“It’s a matter of putting the big toe in the water before jumping in,” said John Taylor, vice president of research for National Venture Capital Association of Arlington, Va.
Venture capital firms provide start-up or later-stage funding for entrepreneurs whose risky companies would be unlikely to attract financing from a bank.
They look for companies with significant risks but high growth prospects. In return, they require partial ownership of the company and substantial control over management, including the right to replace top executives.
The goal is to take the company public in an initial public offering, or sell or merge it with another company at a substantial profit after a few years. Venture capital firms raise their investment money from limited partners, who share in the eventual profits and shoulder the potential losses.
Lately, it’s been more of the latter.
The average venture capital fund lost 23 percent of its value last year, according to research from Thomson Venture Economics and the National Venture Capital Association. The data is based upon a survey of 1,600 venture capital and private equity partnerships with a total capitalization of $534 billion. Venture capitalists have been reluctant to back new companies because of scant interest from public markets for initial offerings of stock.
Unlike the late 1990s, when companies that had never turned a profit attracted billion-dollar valuations, Wall Street financiers now are looking for profitability and more than $50 million in annual revenues, said Robert Fleming, a general partner and co- founder of Prism Venture Partners. And companies are asking for smaller smart-up grants than in the past.
“There’s been a return to rationality,” Fleming said.
The number of venture-backed companies acquired through merger or acquisition in the first quarter fell to 1996 levels, according to the National Venture Capital Association. Just 65 companies were acquired or merged for $1.34 billion.
While venture capital investments declined 10 percent to $3.8 billion nationwide compared to the previous quarter, New England deals rose 25 percent to $691.9 million.
Fueling the growth was the Bay State, traditionally the region’s leader in venture funding. Massachusetts attracted 87 percent of the funding in New England, with 71 deals valued at $618.8 million.
“What we’re seeing in New England and starting to spread to the rest of the country is increased interest in the next generation of technology,” Taylor said.
Companies receiving funding now could be candidates for initial public offerings in five to seven years, Taylor said.
“The question is what valuations the public markets pay for these high-tech companies. My guess is we’ll never see the multiples we saw in 1999 and 2000,” he said.
David Baum, a Prism general partner, said the time is right to invest aggressively.
“We view down markets as the best time to be investing,” Baum said. “The most successful companies we’ve started are the ones during economic downturn. Rents are cheap, there’s great talent that’s available and components are cheap.”
Steve Adams may be reached at [email protected].
