January 3, 2012


Venture Liquidity Takes A Tumble To Close Out 2011

Unlike 2010, which ended with a liquidity pop for venture investors, 2011 fizzled away with acquisitions tumbling and fewer than a dozen IPOs in the fourth quarter, leaving the year's total one shy of its predecessor's.

On the bright side, the 45 venture-backed companies that went public last year raised $5.36 billion, the most since 2007, according to VentureSource, a unit of VentureWire publisher Dow Jones & Co. But two companies--daily deals site Groupon Inc. and social gaming company Zynga Inc.--were responsible for $1.7 billion of that.

Market volatility took its toll on IPOs beginning in August, dashing hopes for a banner year. Nonetheless, the 2011 IPO count was well above that in 2008 and 2009. And the pipeline going into 2012 is even stronger than last year with 60 companies in registration. A year ago there were 44 and two years earlier there were 25.

Facebook Inc., which has yet to file, is expected to go public in the first half of the year, which could ignite broader interest in venture-backed offerings.

Paul Madera, a managing director of Meritech Capital Partners, said he expects to see continued volatility in the markets, which means that anything less than a brand-name company will have a tough time going public. But he said acquirers are still in the market, "at least for sizeable businesses with real franchise value." The IPO market has cooled enough so that "we see more realistic expectations and valuations settling in with companies and investors."

The choppy public markets affected venture-backed M&A, which sank in the fourth quarter despite the billions in cash sitting on the books of corporate acquirers. Deals fell from 162 in the fourth quarter of 2010 to 107 in the final three months of last year, a 35% drop. That left the total for 2011 at 477 deals, nearly 15% below 2010.

Acquirers spent $9.39 billion in the fourth quarter, a 32% decrease from the $13.83 billion raised in the year-ago quarter. Nonetheless, the full-year total of $47.83 billion represented a 23% increase over the $39.02 billion raised in 2010 and was the best annual total since 2007.

The biggest deal in the fourth quarter was Teradyne Inc.'s $510 million acquisition of Sequoia Capital-backed wireless communications company LitePoint Corp. The year's biggest deal was Daiichii Sankyo Co. Ltd.'s $805 million purchase of biopharmaceutical company Plexxikon Inc.

Health care overall declined to 88 deals from 105 the year before, after a fourth quarter that saw just 25 acquisitions, compared to 38 in the fourth quarter of 2010.

Information technology declined to 194 deals for the year, down from 261 the year before, after just 38 deals in the fourth quarter, the lowest total since the first quarter of 1999.

The first three quarters of 2011 "were great," but then "everything basically fell off the cliff" as the public market corrected, said Hans Swildens, founder and managing director of Industry Ventures. "There's a lot of M&A conversations going on everywhere in our portfolio," he said, but the bid-ask spread is too great to get much done. It could take several quarters for the markets to settle down, he said.

Ben Howe, chief executive of investment bank America's Growth Capital, said global economic uncertainty gave prospective corporate acquirers pause as the fourth quarter proceeded. "Companies budgeting for 2012 became uncomfortable with what they were seeing and were told at the most senior levels to pull back," he said.

Howe added that he expected a rebound in 2012.

"The need to do M&A deals for large tech companies is so in their growth plans that they have to jump back in the game," he said.