Adventures in acquisition

The venture capital industry is technology’s canary in a coal mine. Keeping an eye on its health makes sense. I recently attended a presentation by Mark Heeson, president of the National Venture Capital Association. Heeson says reports that the canary is looking like the “ex-parrot” of Monty Python fame are way off the mark.

Despite the fact that the dollars being divvied up by venture-backed companies remains dramatically below Internet bubble levels, the number of venture capital firms has remained relatively stable. Venture capital funds will have doled out US$70 billion from 2003 through 2005, compared with US$210 billion during a three-year span in the midst of that bygone euphoria.

“We have intense interest from [limited partners] in investing in this asset class right now,” Heeson says. “We’ll see about US$25 billion being raised this year by venture capitalists, and that could easily have been US$100 billion.”

As a result, would-be investors are finding themselves waving more money at funds than the funds are willing to take. Exacerbating that squeeze is the fact that more funds are accepting foreign dollars.

“You’re seeing funds which in the past took no foreign money, now taking 25 per cent of their funds from foreign [sources]. And a lot of it is coming at the expense of your public pension funds.”

Those public institutions also are having their investment strategies hampered by federal regulations. Not only have the dynamics of the front end changed for venture capitalists, the back end doesn’t look at all like it used to either. Those sexy initial public stock offerings that made the bubble years so bubblelicious have all but disappeared. “It’s still a real poor environment to go public right now,” Heeson says.

Curiously, this abysmal record isn’t stopping a lot of start-ups from filing the paperwork necessary to launch a stock offering. It’s apparently a bit of a head-fake combined with cagey salesmanship.

Heeson says the mergers-and-acquisitions climate is much more hospitable. “We’re seeing very strong acquisitions across the board in all technologies,” Heeson says. “Two years after the bubble we had literally not a single acquisition where you got more than four times your [invested] money. This year we’re going to have at least a third of all acquisitions at four times the money put in, and many of them are going to be 10 times what was put in.”

Sounds healthy enough.

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