Pages

Friday, October 15, 2010

Tech Professionals Say Venture Capital Model Has Changed Forever

Portfolio.com - a bizjournals property
A slower market for initial public offerings is likely the new norm, and venture capitalists are likely to make smaller bets on smaller companies and make their returns from mergers and acquisitions of their portfolio companies.
That, at least, is what tech honchos surveyed by DLA Piper expect. That’s a major change for one of the most glamorous corners of the innovation business.
It may well mark the end of the big, bold, VC plays, said Peter Astiz, global co-head of the DLA Piper Technology Sector Practice.
Diagram of venture capital fund structure for ...Image via Wikipedia“This is a profound, game-changing development," Astiz said Tuesday in a statement. "If there is a long-term expectation that the IPO market will not rebound, that means a reduction in the number of dramatic ‘home runs’ for venture capital investors and lower overall returns. Fewer IPOs also means fewer small and medium-size public technology companies, which traditionally have been the acquirers for venture-backed company exits.”
Astiz went on to say that tech companies would continue to move forward and investors would still be active, but that the venture model is changing. "For startup tech companies, the bar is being raised, capital will be harder to come by, and pressure to perform will increase.”
Those expectations are reflected in the third-quarter report on venture exits by the National Venture Capital Association’s report in conjunction with Thomson Reuters. (Download a PDF of the report by clicking here.)
Image representing Google as depicted in Crunc...Image via CrunchBaseThe market for public offerings of venture-backed companies is recovering from the disastrous 2009 period. But it’s nowhere near the levels seen in the boom times of the late 1990s, and there haven’t been any blockbuster IPOs like that of Google.
Instead, venture capitalists have made their money through the sale of their portfolio companies to other firms. In the third quarter, there were 27 deals with disclosed values worth $3.8 billion, up from 22 deals worth $2.9 billion. As for IPOs, there were 14, worth $1.2 billion, in the third quarter. …
The technology professionals surveyed by DLA Piper agree. Nearly 60 percent say the venture model has been permanently altered. But that’s not all bad news, because with technologies like cloud-based computing available, it’s cheaper now to build a company. So VCs may be able to make smaller bets across more companies and get high rates of returns on those small bets.
In other topics, tech leaders told DLA Piper they expect:
  • The economy will continue to grow, albeit slowly, with 85 percent of those surveyed expecting at least a couple of percentage points of growth in the coming year.
  • Seventy-two percent expect sales increases in the coming year.
  • Forty-three percent expect to keep staffing levels flat.
“While some economists and headlines question whether the U.S. economy is headed for a double-dip recession, technology leaders seem confident of a sustained recovery,” Astiz said. “Tech leaders are forecasting stronger sales and earnings across the board, yet they are not planning to invest in hiring nor R&D. This suggests that we may be in for a prolonged period of guarded investment and slow growth.”
Enhanced by Zemanta