VC valuations rise again, but pace of growth slows
“As we emerge from a slowing economy, the IPO sun will rise again,” says Howe.
While venture capitalists still placed higher valuations on the Bay Area companies they backed in the fourth quarter, the pace of rising year-over-year valuations slowed from the year's previous quarters.
That was among the latest findings by Fenwick & West's quarterly survey of venture financings based on 103 Bay Area companies that got VC backing in the fourth quarter.
The Fenwick & West Venture Capital Barometer showed a 55 percent average price increase for companies receiving venture capital in last year's fourth quarter compared with the companies' prior financing round. That's not too shabby. But companies getting venture financing in the first three quarters of the year saw an average price increase from their previous round of 75 percent.
The pace of up rounds -- meaning the latest venture financing was made with a higher valuation on the company's securities from its previous round -- to down rounds also flagged. In the fourth quarter, up rounds accounted for 69 percent of the deals vs. 22 percent down rounds and 9 percent flat. That compares with an average of 80 percent up rounds and 11 percent down rounds and 9 percent flat in the prior three quarters of 2007.
But the Silicon Valley law firm pointed out that venture capital enjoyed a rather robust year in 2007. That's good news for the Bay Area, which receives about a third of all venture dollars invested.
Venture capitalists put to work $29.9 billion in 2007, making it their most active year since 2001. It was 8 percent higher than the amount invested in 2006. But the fourth-quarter investment of $7.3 billion was about 5 percent less than last year's second and third quarters.
The red-hot cleantech sector saw the greatest growth, with 187 transactions raising a total of $2.5 billion, up 67 percent from 2006.
There was also some good news for VCs looking to cash out of previous investments.
The law firm noted that 2007 was the best year for both initial public offerings and acquisitions of venture-backed companies. The acquisition of venture-backed companies rose in the fourth quarter, with 106 transactions totaling $16.2 billion, compared with 97 deals totaling $11.3 billion in the third quarter. Last year saw a total of $46.2 billion paid for venture-backed companies, with a median transaction price of $98 million, both were the best showings since the bubble year of 2000.
Public debuts of venture-backed companies rose in the fourth quarter, with 26 initial public offerings raising $2 billion. For the year, 74 venture-backed companies raised $6.7 billion in IPOs.
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The IPO window was closing as the year wound down and investors rediscovered that risk is a four-letter word. "Although it does not resemble the securitized toxic waste and leveraged loans contaminating the capital markets, IPOs have been eschewed during a time of uncertainty," Benjamin Howe, CEO of investment bank America's Growth Capital, wrote to clients this month.
In the first two months of this year, only 11 IPOs have been priced, including three tech deals. That's a 70 percent decline from the 37 pricings that occurred in the first two months of 2006. Some hope Visa's public debut -- expected to be the nation's largest IPO ever -- will whet investors' appetite for new issues. But Visa's half-century of operations and immense profitability isn't likely to jumpstart the market for the typical IPO near-term.
"As we emerge from a slowing economy, the IPO sun will rise again, regain its footing and prosper heading into the fourth quarter of 2008 and (into) 2009," Howe said.
Proving once again, that investment bankers will always see the silver lining amid ominous clouds.
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