October 18, 2011
According to the NVCA and Thomson Reuters, Q3 was a big ouchie for venture capital firms. In fact, only 5 venture-backed companies provided liquidity via IPO exits last quarter. This was down 77% from the 22 companies going public in Q2. The last quarter was a heart breaker for venture capital managers who were counting on the robust bull cycle that started in January of 2010 to continue to boost returns, increase profits and simplify the fundraising process.
The repercussions of the weak economy and skittish public market investors will be felt for startups seeking funding, as the set backs of the past quarter will limit the amount of cash available to institutional venture investors who are dependent on a robust IPO and M&A market to provide cash for additional investments.
“While the IPO market screeched to a halt in the second half of the 3rd quarter, the acquisitions market continued to move forward,” said Mark Heesen, president of the NVCA. “Quality acquisitions continue to get done, which should help venture capital firms return money to limited partners and better position themselves to raise new funds. However, current economic instability could reduce the number of high return acquisitions while keeping new IPOs at a seriously low level for the remainder of the year.”
On the bright side, the angel market appears to continue to thrive, and the current trends of relying on cloud computing, open source software and crowdsourcing are allowing many technology companies to bootstrap at a fraction of the cost required to fund a company in the ’90s. The lower capital requirements translate to attractive matches between entrepreneurs seeking funding and angels who tend to invest less capital than a VC firm. Angel investors are benefiting from lack of available capital from venture firms, which translates to more quality startups being left on the table for angel funding.
Meanwhile, we are deep in an IPO drought with little to no signs of relief.
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