As bad as venture-backed company exits were in the first quarter of 2009, they are certainly due to improve, albeit a little bit, in the second quarter.
In the face of an economic downturn, there were zero VC-backed IPOs in the first quarter of 2009, marking the second consecutive quarter in which there were no new issues. There has never before been any record of back-to-back quarters of no venture-backed IPOs, according to the Exit Poll report released last week by Thomson Reuters and the National Venture Capital Association (NVCA).
In addition, M&As were also lousy in Q1. Only a modest 56 M&A transactions were recorded in the previous three months for VC-backed companies, 13 of which had disclosed volumes, totaling a combined $654.3 million.
The last time a VC-backed went public was in August when website hosting services provider Rackspace Hosting Inc. launched a $188 million IPO. However, one company last week said that it intends to debut soon, perhaps later this month.
Rosetta Stone Inc., an Arlington, Va.-based provider of language learning software, has set its IPO terms to 6.25 million common shares being offered at between $15 and $17 per share. It would have a market cap of about $345 million, if it prices at the top of its offering range.
Rosetta Stone, which was acquired in a 2006 management buyout by ABS Capital Partners (44% pre-IPO stake) and Norwest Equity Partners (28.7%), plans to trade on the NYSE under ticker symbol RST. The company initially filed for the IPO in September.
The expected IPO of Rosetta Stone is a hopeful sign that perhaps more and more companies are poised to take advantage of improved market conditions in an economy that’s aching for a revival.
But the NVCA points out that the number of companies ready to go IPO is dwindling. Counting Rosetta Stone, there are currently 26 venture-backed companies filed for an IPO with the Securities and Exchange Commission. In addition, six venture-backed IPOs withdrew from registration in the first quarter.
Still, Mona DeFrawi, CEO of InsideVenture, is confident that liquidity events will return. The exits may not come in the form of an IPO, but liquidity, through late stage financing, for example, will happen, she says.
What gives DeFrawi hopes is that her Menlo Park, Calif.-based organization held a conference in Santa Barbara late last month in which 50 late stage private companies presented to a mix of institutional buyers that included PE firms, late stage venture investors and other financial institutions. The idea is to get the buyers to invest in the companies, which otherwise might go IPO.
In the week following the conference, DeFrawi says that she knows of 10 companies that are actively in negotiations to raise late stage financing. Two of them are “extraordinarily likely” to raise cash. One is on tap to raise $40 million and the other is looking to raise $50 million.
“There are a lot of great opportunities out there, and it’s not necessarily an IPO,” she says. “We’re starting to see movement in the market.”
Given the non-existent IPO market, the NVCA says that corporate acquirers are in a position to be more selective this year and bide their time when considering acquisitions.
“Without a doubt, this is a buyer’s market for M&A,” says Matt McIlwain, managing director of Madrona Venture Group.
Indeed, the M&A market saw a huge decline last quarter with only 13 disclosed sales of VC-backed companies totaling a combined $654.3 million.
The second quarter will definitely reach that disclosed valuation with one deal. Cisco System’s announced purchase last month of Pure Digital for $590 million is not part of the Q1 tally. That deal is not yet finalized.
But McIlwain cautions that he doesn’t expect deal size to pick up anytime soon.
“Some deals will certainly get done this year. There are M&A opportunities out there for VC-backed companies,” he said. “But the average deal size will certainly drop. We’re gonna be lucky if we see huge deal sizes this year.”