As happened during the technology bust at the early part of last decade, the gap between the amount of venture capital raised by companies and the amount they sold for is narrowing.
According to data from Dow Jones VentureSource, the median acquisition value of a venture-backed company in 2009 was $26 million, which is 1.3 times the median amount of venture capital - $19.8 million - that these companies raised in their lifetimes. That’s less than the 1.5x multiple in 2008, and well below the 3.6x experienced in 2007.
In fact, it’s the smallest gap since the dark times of 2003 when the multiple sat just above 1. The latest first quarter may signal a slight recovery from 2009 - the multiple for the three months was 1.5x.
The shrinking gap is most evident in the health-care space, where the $26.9 million median amount paid for these companies in 2009 is far less than the $41.4 million raised by them. That compares with a 2.3 multiple in 2008 and 2.4 in 2007, and is the easily the smallest ratio in the decade. No wonder investors are looking at ways to lower the cost of developing drugs and medical devices, as we discussed here and here.
Information technology companies haven’t fared much better. On a median basis, these companies barely sold for more than they raised in 2009 ($25 million value versus $21.65 million raised) and an equal amount ($26 million) in 2008. That compares with a 2.7x multiple in 2007.
The services side, however, has produced a wider gap in recent years even if it’s narrowing. Consumer services companies, where VentureSource places all the dot-com, social media and retail companies, sold for a median value of $20 million in 2009, about 3 times more than the median $6.7 million raised. That’s about even with the 3.1x multiple in 2008, though smaller than the 7.7x multiple in 2007 and 10.1x multiple in 2006, the headier days of venture capital.
Likewise, business and financial services companies generated a 3.5x multiple in 2009 ($45 million value vs. $13 million raised) and 3.9x in 2008 ($59.5 million versus $15.5 million).
We previously wrote about this trend in July when things started looking bad and we’ll keep you posted as this year progresses. If the IPO market really recovers, it should drive M&A prices higher and VCs can breathe a big sigh of relief.
COMMENTARY: Whoa, I knew that liquidity events were terrible in 2009, but I didn't realize things were this bad. A lot of startup owners weathered the recession by downsizing or shutting down in order to cut their losses. Those that were lucky enough to find a buyer sold for less than they invested. I don't think things will be that much better in 2010. IPO's in 2010 so far are about a third of what they were in 2007, prior to the start of the recession. Valuations are way down, and this certainly accounts for the shrinking gap between VC investments and the exit via M&A.
Courtesy of an article dated April 23, 2010 appearing in The Wall Street Journal's Venture Capital Dispatch
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