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— Burn Rate —
Financial paralysis isn't confined to the credit markets--it's also afflicting venture capitalists. The third quarter saw the fewest number of mergers and acquisitions and initial public offerings for companies that have raised venture capital in five years, according to new data from Dow Jones VentureSource. Venture capital-backed companies generated $4.6 billion in liquidity for their backers. That's a 66% drop from the year-earlier period. Of that total, 66 exits were acquisitions worth a combined $4.4 billion, while the lone initial public offering was for Rackspace Hosting Inc., which raised $187 million in its market debut in August. Shares of the San Antonio provider of on-demand Web hosting have since tanked. Stuart Ellman, a co-founder of RRE Ventures LLC, a New York VC firm with $850 million under management, says that companies and entrepreneurs face an exceptionally arid exit climate.
"RRE has a number of companies that had zero revenues when we invested and which are now doing $100 million or more in revenues and growing very quickly," he says. "These companies have achieved what they needed to achieve, become market leaders, yet they cannot go public or exit under the assumptions that employees or founders assumed when they began." Dow Jones VentureSource global research director Jessica Canning says 2008 is shaping up to be the worst-ever year for IPOs. That, in turn, threatens to damp venture investment, which would have long-term repercussions for tech exits.
Other trend lines underscore the difficult environment. The median time until a VC-backed company gets bought has stretched to 6.1 years, while price tags have roughly halved compared with last year. Ellman says VCs have no choice but to sit tight and focus on helping portfolio companies grow until the deal markets ease. "It's as if somebody told you that your goal was to jump five feet in the air," he says. "After a few years of practice, you build up the ability to jump five feet, and then they change the height to six feet." -- Olaf de Senerpont Domis and Mary Kathleen Flynn It's Feb. 9, 2005. Hewlett-Packard Co. CEO Carly Fiorina has gotten the boot after a stormy 5-1/2 years, including a widely panned deal for Compaq Computer Corp. HP shares languish at $21. Sales of PCs, servers and tech services stagnate, as critics press HP to spin out its flagship imaging and printing unit. And the worst is yet to come in the form of a bizarre scandal over the company spying on reporters. Flash-forward to today. Sales are soaring, from $79 billion in 2004 to $113 billion. Shares top $45. Costs are plunging, margins expanding. The balance sheet is strong, with cash flow approaching $10 billion. In short, Palo Alto, Calif.-based HP, which a few years ago appeared to be hastening its demise with ill-conceived acquisitions, is emerging as a case study in corporate turnarounds. Such comeback stories rarely happen in any domain, let alone in technology. Tech punishes companies that fall behind the curve, misgauge trends, fail to execute. HP's revival highlights why M&A remains a vital instrument of corporate strategy: It's often the fastest -- sometimes the only -- way for big, mature companies to make major course corrections. HP's recent purchases are a case in point. The company earlier this month bought LeftHand Networks Inc., which makes storage software for "virtual" computer networks, for $360 million in order to dive deeper into a rapidly growing software niche. Meanwhile, in its biggest acquisition since Compaq, HP in May bought Electronic Data Systems Corp. for $13.9 billion, which will strengthen the buyer's tech services offerings in burgeoning areas like "cloud" computing. HP's rebirth isn't yet the stuff of legend, like IBM's. But the company's management deserves credit for bringing it back to life. -- A.S. | |||||||||||||||||||||||||||||||||||||||||||
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