You didn’t really think that Silicon Valley would be immune to the general convulsions in the overall economy, did you? I am not sure it is as bad as the NYT gleefully makes it out to be, but there is growing evidence of a tech slowdown, including M&A deals and IPOs drying up, slower job growth, signs of weakness on Web advertising, cautious corporate IT spending, and rising costs for companies that offshore their labor force due to the decline of the dollar.
The latest numbers from the National Venture Capital Association show that the startup economy was starting to feel some pain in the first quarter. Venture-backed M&A deals hit the lowest level in a decade, with only 56 deals announced in the first quarter, down from 83 in the fourth quarter of 2007. The IPO market also dried up, with only five venture-backed IPOs, compared to 31 in the fourth quarter of 2007. (See chart above). The average amount raised for each IPO was $56.6 million (down 42 percent quarter-over-quarter). And the average M&A deal size was $124.6 million (down 40 percent quarter-over-quarter)
The overall value of disclosed M&A deals in the first quarter was $2.5 billion, compared to $8.4 billion in the fourth quarter of last year:
Diving a little deeper, Internet deals still dominated the first quarter of 2008, with 12 deals valued at $1.7 billion. But the number of deals where investors are taking a loss is going up, and the number of deals with outsized returns of 4 times or more of the amount of venture capital invested is going down. Are our readers in Silicon Valley feeling the effects of the downturn? Please share in comments.
Let’s hope the reporters are overplaying this. One area of growth in Silicon Valley these days, however, is mobile internet technology. It seems the race to have the best mobile app and mobile internet service is a growth area (based on anecdotal evidence.) Most experts think we are about two years away from a fully-accepted mobile phone internet, but two years can fly when you’re having fun.
sounds like its overhyped to me… whats with the explosion in deal value for Q3 and Q4 in 07?
It’ll be interesting to see how this plays out.
In principle, it shouldn’t impact start-ups too much (particularly those that don’t need revenues for a while), given that the VCs won’t need to exit these investments for several years… and in fact you could argue that a down-market it’s a great time for VCs to be investing in startups. However, human nature being what it is, a slowdown/recession may well affect early stage VC’s confidence.
It will also be interesting to see if there’s any M&A activity with privately held VC-backed companies acquiring public companies. The idea being that privately held VC-backed companies have a floor to their valuations based on their last round of financing; so falling share prices of public companies mean that private companies start to see some public companies as bargains.
How long can the game of “build an incremental feature and sell to Google/MS/Yahoo” go anyway? If there’s anything to be concerned about it’s the lack of real innovation amongst many new startups. The revolution seems to have passed and is left behind with a swath of mini-evolutionary steps, which doesn’t make for significant value.
I’m not at all concerned over the health of the money-to-startup-to-acquisition path, I just believe that we’ve moved to a different place in the food chain.
So, less competition? Good time for a startup.
teh dollar is declining!!
companies that I talk to are shying away from IPOs more due to SOX than the market itself. Clients are being cautious, but still moving forward. It’s not feeling anything like 2001 though, and hopefully won’t.
Speaking mostly about India but also somewhat in China, Romania and Russia where I work with teams - definitely offshore costs are rising for US companies due to the weak dollar. Job market is still very hot for places like India and show no signs up letting up, so salaries are incremented pretty much every six months. Larger companies are still hiring 2000 people per week in the hopes that a few hundred actually show up. Rents are increasing and the quality of services is not getting any better, while rates increase (phone, connectivity, electricity).
Bribery and under the table manuevers are still the norm so the overall efficiency remains hard to navigate. The good part is that entrepreneurs, in the broadest sense of the term, are are very slow to take root, so there is lots of competition in bidding (keeping costs in check) but this may not last forever. I know a chinese company who’s outsourcing its software dev to Vietnam b/c China is too expensive.
Investment opportunity time.
Aaron, @2, the spike in Q3 and Q4 was because of some really large deals like the $1.7 billion acquisition of Reliant Pharmaceuticals by GlaxoSmithKline, the $925 million acquisition Oxygen Media by NBC Universal in October, and the $1.4
billion acquisition of Worldspan Technologies by Travelport in the 3rd quarter.
These were outliers, but the total value of deals is still at just under half normal levels.
One quarter of data is hardly conclusive, especially looking at the last 2 Qtrs which had explosive growth. I am curious, if there were 41 deals last quarter in IT, how does that compare with previous quarters? There’s no breakup by industry for previous periods, so it’s hard to tell which verticals are slowing down or if it’s across the board.
If the downward decline continues in the current quarter, then I would be very worried. But there isn’t enough information here to justify the ‘doom and gloom’.
SV is screwed! It never recovered from the Dot Com bubble burst (wouldn’t a stimulus package been great back then). All the money folks got cheap. SV manged to never let the salaries grow back, everyone killed themselves for nothing, AGAIN!
SV snobbery has cut it own throat again. I am going to start recruiting for folks who want to get out of here. They pay the same money out east.
Online video is headed for consolidation throughout the rest of 08. Venture backed startups will be pushed by their money masters to do deals.
A slow down only pushed back the timetables for some of these deals.
The entire market is based on deal making.
In addition to online video aggregators and online video technology companies going I see general content developers and smaller ad networks and online video ad networks getting swallowed.
I agree with Tony (#5).
the recession started after the third down in December of 07.
We are in the thick of it….offer more value for less money and you will be fine.
Welcome to America, where we self-correct. The only country where a skinny kid with a funny name can educate himself on good speaking and go from oba-who? to Obamahhhhh. Dig in, hold back the doomtroopers and work a 100 day optimistic offensive. Get optimistic, it’s only money…
As for the numbers, they appear 40% (see 9.) less than the average ahead of Q3/Q4 which looks more like a spike than the previous two years.
JK
The changes in cost structure between the past boom and this boomlet assure that companies will survive, especially those that are inured to frugality and really have creative products and services.
There is much less of a gulf between the supposed decline and the apogee than last time.
it would have been nice to see a longer graph, how does this compare to the last 5-10 years. And yeah things are slowing down, people are nervous and less likely to gamble on vaporware.
Also, keep in mind that during the past boom there were mild to serious corrections such as the Asian economic crisis and the meltdown of LT Capital management, leading pundits to declare that we had seen the end of the world, and that the year 2000 problem was going to be nails in the coffin. For 4-6 months at the end of 1998 due to the fear and uncertainty, VC funding slowed, and then kicked into high gear in January 1999. (It slowed the closing of our “A” round by several months). Assuming Microhoo happens, then what? Will it be looked back upon as an AOL/Time Warner moment?
Recessions are part of the normal cycle. They represent opportunities for the sharp-witted…
time to apply to business schools before the flood, worst case scenario in September you tell them you changed your mind.
There isn’t enough conclusive data there to prove what you are forecasting.
Erick,
That first graph is a crime against Tufte. For the love of god, fix the x-axis labels.
Imagine… You Can Earn money and Socialize on facebook or myspace In Just 30 days !
The first social networking website that actually pays its members! It’s a lot like MySpace or Facebook, the only difference is you get paid for your hits, blogs, friends, and just browsing. Tom from MySpace makes about 20 MILLION a month from the companies that advertise on his site. Is he sharing it? No. Join for free today at:
http://2url.us/1930
A lot of people make over $1,000 a month on this site. But even if you aren’t a hardcore internet user, you could easily make an extra $50 a month easy.
@Simon Brockelhurst (#3): did you even read the charts? what is this VC floor you talk of? 7 of the 18 deals in Q1 were done for less than the $$ invested (even worse than being done for less than the previous valuation).
I don’t even want to get into your comment about startups that “don’t need revenue for awhile”…those are exactly the kind that can’t sustain themselves in a down market…
Please head back to commenting on digg with that kind of analysis.
Thanks
There’s no way there won’t be some impact. When money gets tight, it impacts everyone along the food chain. Yes, VCs “allegedly” have longer time horizons, but they depend on the upstream capital markets like any other investor/lender. No way it will be like 2000 because there isn’t nearly the excess, but I think we’ll see more smaller deals, less friendly terms for entrepreneurs and more deadpool entrants as it gets harder to get next rounds if you aren’t showing serious progress.
This is far too short in scale to be a trend. It’s like watching a stock price from one second to the next.
I posted this story last week.
The IPO market is heavily leveraged to a strong market, and IPO’s will routinely get delayed when the stock market is showing weakness. So, in that instance, this is possibly too short a time horizon to look at.
The M&A valuations are more troubling, but two things:
1) A weak market can cause more friction between the acquiring and acquired companies. See Microsoft & Yahoo.
2) Investors losing money and compressed valuations is inevitable when you consider the herd mentality of VC investing. TC constantly charts the copycat competitors within a space - Green investing, mobile ad networks, thin-client instant messaging, casual gaming, etc. Many of these companies will become empty vessels for which larger companies will buy the software but pay no premium for an installed base of users or strong brand.
@Jimbo. LOL! We’ll see. The devil’s in the detail, not in the charts, I’m afraid.
You’re mistaken if you think all business models for all companies demand early revenues. It depends on how and where value is created in the business.
You’re similarly mistaken if you think that all strong privately held companies - ones that are delivering on their plans, and that have deep-pocketed investors - will be doing M&A transactions where their valuations are less than the valuations from their previous financing rounds.
And if you think that strong privately held companies like these aren’t starting to look to see if there are any bargains to be had on the public markets right at this minute, well… you got it wrong again.
Congratulations - you appear to know nothing about business!
“The C.E.O. Confidence Index, measured by Chief Executive magazine since 2002, plunged to a record low last month. Not mincing words, 52 percent of top chiefs surveyed called current business conditions downright “bad.” No word on whether the magazine plans to add choices like “truly abysmal” or “utterly hopeless” to the survey, just in case “bad” ends up becoming business as usual.”
http://www.nytimes.com/2008/04.....suits.html
Also agreed with #5… It would be nice to be able to start a company without having to pay second-stringers too much money just to stay even with over-financed, dead pool-bound competition.
The NYTimes story struck me as pretty factual, I didn’t see any schadenfreude. Why do tech types so love to bash the Times? Andreessen’s always going on about them too. They’re not perfect, but they do more high quality original reporting than anyone else. TechCrunch can talk when you hire 500 more reporters and start doing serious investigative news
As to the story, I agree with Tony and Paul. If you have a good idea and skills, this is a great time to build something. When money is too easy to come by for too long, too many quick-buck schemers start pissing in the pool. A little belt-tightening separates the wheat from the chaff.
I don’t know… before the economic crisis became accepted and obvious, we were getting so many inquiries about developing web 2.0 platforms for nascent web-based businesses…. And the buzz is still pretty strong. In that sense, I feel like our web development/application development business is a good barometer.
Now worries just diversify your tech portfolio with a tech acquisitions in a booming market like shipping… I’m sure we can find a place for your money here at gCaptain.com
Just out of interest, where do you get all your stats from?