Even though Barris stresses that only three of the 12 investments New Enterprise Associates did in October were new, as opposed to follow-on rounds, he’s not arguing with the notion that the firm is the most active venture firm nationwide—at least for October.
Mergers, acquisitions and IPOs are all picking up, he says, and he’s predicting good times for the venture industry next year, he tells PE Week contributor Deborah Gage.
Q: You cite new investments, more of equilibrium in pricing, and less hesitation to make commitments in the last few weeks. Why are these changes happening?
A: It depends on the nature of the investment. If it’s an early stage startup, I think there were a lot of entrepreneurs sitting on the sidelines waiting to get financed at a valuation they wanted. For more mature companies in need of working capital — to the extent they could manage a delay in that — they followed the same path as the entrepreneurs, waiting until things were better and we reached equilibrium in pricing. And I think some were out there squeezing expenses and finally got to the point where they have to have the capital.
But I would point more to the first thing. A certain amount of psychology comes into play—people feel better about the environment. We have examples even in people who work closely with our firm, who are on our payroll—innovators who incubate companies in the confines of NEA’s walls. They’ve held back from coming out, and when I’ve asked why, they want to know that once they start it, they can get financed this round and feel comfortable in their ability in follow-on rounds. I think that’s good news.
Q: Are there any exits NEA has done this year that you’re particularly proud of?
A: We’ve had several recently within the last month. We did an IPO of Echo Global Logistics, which procures shipping, and they’re doing fine—the last time I checked they were trading above their offering price.
We’ve also done over a dozen mergers and acquisitions this year, most notably Data Domain, which was sold to EMC for $2.5 billion. The M&A market has been at a reasonable level all year long, but it’s been particularly strong the last three to four weeks.
Q: What about those people who say there are structural problems in the U.S. stock market that will prevent IPOs from returning to previous levels?
A: Yes, there are structural impediments, starting with Sarbanes-Oxley and the costs that small companies are burdened with. There’s the lack of infrastructure — the investment banking community has been unwilling to take out smaller companies — although we’re seeing things happening with Second Market [one of NEA’s new investments last month] and new liquidity options and boutique investment banking firms.
There’s more willingness on the part of the venture capital community to work with these other options. It’s an aggregation of lots of things changing for the better. In China, there are exchanges that cater to smaller companies. It all bodes well for the future, although whether we’ll get back to the IPO level of a decade ago is debatable.
Q: Does NEA have companies poised for a sale or IPO next year?
A: I can’t talk about it, but we have several teeing up. When you look at their fundamentals they are IPO-ready—on a run rate of $100 million in revenue and a track record of profitability. I feel good about the backlog, and now that we’re seeing light in the IPO market, investment bankers are aggressively pursuing the companies I’m referring to.
Q: What’s your outlook for the venture industry next year?
A: I hope it shrinks. Fundraising and investing are down materially. Will it go down further? I’m not sure.
But it’s not a very complicated model—we’re very cyclical and we always have been. People talk about the disk drive and the Internet and the dozens of me-too companies, and it’s always characterized as a bad thing, but the truth is, it’s not a bad thing. At the end of the day, there was a lot of value created. We create companies—maybe too many and a lot go out of business, but we create new industries.
Creative destruction is OK, and it’s not going to change. People like to think we’ve learned our lessons, but opportunities and new waves will come along. We have a system in the U.S. that’s being replicated in other parts of the world that very quickly reallocates resources at incredible speeds and focuses on opportunities. That’s the creation part. It’s not always the most efficient part—there is some sloppiness—but the speed part is a lot more beneficial than the sloppiness
Our job is to pick the right companies, so we’re not invested in the twelfth company doing the same thing. That’s our job, and some firms are better at it than others. I have no doubt that there’s opportunity out there. I’m seeing more high-quality deal flow than I have in a long time—in years. Times like this tend to chase away the weekend entrepreneur.