January was a month of revelations about how dismal 2008 was for dealmaking. No one expected anything good to surface in the various tallies, but it was hard not to wince as the data poured in.
The National Venture Capital Association and Thomson Reuters reported that six venture-backed startups went public -- the worst performance since 1977. There were only 260 acquisitions of VC-backed startups, making 2008 the first year in five when this annual M&A tally dipped below 300.
The fourth quarter of 2008 was obviously worse than the rest of the year, with no venture-backed IPOs and only 37 acquisitions.
Despite all this, there were exits. Not great ones, but enough to help venture capitalists disentangle themselves from startups that no longer seemed deserving of more cash, and enough to buoy one segment of investment banking that seems to still be making hay -- the technology M&A advisory boutique.
These small and nimble teams of bankers, many with big firm pedigrees, are seeing no slowdown in dealflow. Valuations are not what they used to be, bankers are putting in more hours to earn mandates and deals are taking longer to close, but they are getting done.
New York-based Updata Advisors Inc., for instance, advised on 14 deals last year, the same number as in 2007, and half of 2008's transactions were closed during the last quarter, says partner Don More. "Venture funds are very desirous of exiting from companies that are not top performers," More says.
Silicon Valley's GrowthPoint Technology Partners, founded in 2005 by several bankers from the former SVB Alliant, had eight mandates last year, and its bankers predict closing as many as a dozen in 2009. "We think boutiques will flourish in this environment," says GrowthPoint managing director Michael Shepherd.
Both firms, whose clientele are primarily venture-backed startups, claim to have strong pipelines, yet the new year has brought a degree of tentativeness among both buyers and sellers. Few see a real recovery in the overall economy until the second half of 2009, and some are holding off, at least temporarily, with making corporate strategy decisions. "I feel there's been a pause, and everyone has become a bit introspective about what the year ahead will bring," says Updata's More.
In a recent e-mail, GrowthPoint, whose average deal size is around $70 million, separated buyers into three categories. A quarter of potential acquirers are conservative, evaluating deals with an eye toward pulling the trigger once an economic recovery begins. Twenty-five percent are considered aggressive. They are "actually looking for higher deal flow in terms of absolute number of deals," GrowthPoint said. The balance haven't changed their buying habits in light of economic conditions.
Deals are taking longer to get done (six to eight months), but they are happening, GrowthPoint said. The firm advised Q-Layer, a cloud computing startup, in its sale to Sun Microsystems Inc. in January. So far this year, Updata has advised Yosemite Technologies in its acquisition by Barracuda Networks Inc. and Orchestria Corp. in its purchase by CA Inc.
With transactions taking longer to reach the definitive agreement stage, firms such as GrowthPoint are spending more time working with clients before actually getting paid. "We try not to engage until we have some visibility, and then we actually get the mandate," says Robert Horstmeyer, a GrowthPoint managing director. "It turns into a shorter burst between getting engaged and getting the deal done."
But only small advisories can afford the luxury. GrowthPoint does not rely on a support staff to do deal research or put together PowerPoints -- the bankers do these things themselves, Shepherd says. "It doesn't take much for us to make a decent living," he says.
That's certainly a credo many VCs wish their portfolio companies would adopt, but not all investors view 2009 with the gloom espoused by the now infamous presentation last October by Sequoia Capital warning startups of the VC winter ahead.
"If you look at the history of booms and busts, at the bottom people tend to think we'll be living in caves," says Charles River Ventures' George Zachary. "That's false and completely driven by emotion. It is going to be tough sledding for a while, but I don't think we'll be going back in time 10 or 20 years."