The liquidity drought for venture-backed startups, which was already declared to be a crisis in the second quarter when not a single VC-backed IPO went out, continued in the third quarter.
For the first three quarters of the year combined, IPOs brought in only $470 million and M&A activity totaled $11.3 billion, a steep decline from prior years (see chart). Don’t expect the situation to get better any time soon.
Although there was one IPO in the third quarter, RackSpace, which brought in $187.5 million, that was less than half of what the company had expected to raise when it initially filed. In the third quarter of 2007, by comparison, IPOs brought in $945 million. Mergers and Acquisitions activity was also down in the third quarter, bringing in $3.5 billion compared to $10.8 billion in the third quarter of 2007, according to The National Venture Capital Association and Thomson Reuters.
In terms of number of deals, there have been 199 M&A deals so far in 2008 and only 6 VC-backed IPOs. By comparison, for all of last year there were 359 M&A deals and 86 IPOs. In the third quarter alone, there were were 58 M&A deals, compared to about 70 in each of the previous two quarters (numbers which have been revised upwards since the last report came out). And the single IPO is at least better than the big fat zero that came out in the second quarter.
Breaking the numbers down a bit, IT startups accounted for 38 M&A deals in the quarter (or 65%), and $1.7 billion of the total disclosed deal value. Of those, only 9 were Internet startups, which accounted for only $251 million of disclosed deal value.
The charts above compare the first three quarters of 2008 to previous full-year totals. So the last data point is not completely apples-to-apples, but it gives you a sense of how much would have to be made up in the fourth quarter to get back to parity. (Anyone wan to take bets on that happening?). You can see the underlying data in the table below:
Update: I’ve now added two interactive iCharts of the graphs above with quarterly data.
It’s only getting worse from now now, unless the government does something about it. The trends are related to the going-down-hill economy.
Because the government is SO good at fixing things…
This will clean up the valley for sure.
Yeah, but no one is noticing GreenTech, which just had a record quarter w/ $2.8 Billion invested thus far in Q3 alone. Supposed to stay strong on through 2010 until we are out of this hole. Many IPO’s already filed. Just goes to show that there is still hot sectors of tech out there, just maybe not in the unprofitable widget market at the moment.
..ironically, for greentech to achieve futher traction will require increase consumer spending and open lines of credit.
No Exits, dont panic. Just make sure your startups have a strong unique personalized digital footprint on the net and if they dont they better invest your investment in one ASAP.
venturelocator.com
How about UniqueLocator.com? Or better yet, FootprintLocator.com?
Don’t be too fast to blame markets/government. How about the fact that VC’s have financed far too many “cool / no biz model” start-ups that even Wall Street didn’t want any part of … and that is saying something.
George
i think most will take the money and run just like they did in 2000 causing the internet to crash again. is it illegal. i doubt it since we seen no one go to jail for the crash of 2000.
CriminalLocator.com
Ouch.
What impact is the current crisis having? Money folks out there — of the recession, credit freeze, and i-bank institutional failures, which is having the greatest impact on SV?
I agree that it is going to continue to get worse, but the smart entrepreneurs will find a way to make money in this environment
The Church of Cowherd
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Nice post, Erick. VC-backed IPOs were in decline well before the current Wall St. meltdown. No one thinks about IPOs anymore as an exit strategy. Most startups I work with here in NYC just want to stay alive, solvent and independent, a huge change from the Nineties, where everyone wanted to do an IPO.
Important thing is to cut your unnecessary costs and have a first revenue source for the startups.
Not a great time to be a VC….but It’s a great time to be an early stage startup. Get your money now and quietly build your base. Go positive cash flow in 2011….just in time for the turnaround.
Now that’s what I’m talkin about!
Yeah, it is definitely tough to put your money anywhere than where you KNOW it will be safe. It will be interesting the next few years to see who gets funding.
Financial Fallout: Alternative Investment Opportunities
How would you reflect on this article given recent conditions?
http://www.tech...-bubble-bubble/
I understand the general financial climate is quite different, but I felt that the tech spend on companies that had no real business model other than “oh, Google makes billions off advertising, so will we” and was bound to happen regardless.
its 2001 all over again guys….lock the doors and keep the gun handy
I agree that we are in economic down turn, due to over inflation of debt over last few years and the consequent ‘pothole’ of diminished of buying via borrowing power. Still I would point out that there is a financing factor to M&A and IPOs; as these transactions often require loans and insurance to be carried out. Investor attitudes also play a significant part of this equation. In negative markets a assets swing below the actual real value. We are close to the same volume in M&A as we had in 2005 and 2006 at this time… which i think might be an indication that deals are going M&A going on with undiscloved value. What does that “*undisclosed” portion of the deals substanciate to?
There is a reason to consider an international vacation
… There are some interesting things in international technology markets. I think we will see some IPOs and M&A activity there which might have a positive effect on the sector in US (or at least keep the sector from stagnating). As US VC probably have investments in international start ups, and in general the world financial markets are interdependent.
Hopefully all we be well, minus the 700B $ we will owe the banking industry for messing up the banking industry ?
o hei are we gonna get another heave from jason calcanis telling why you shouldnt jump out a window?
I’m certainly going to stop paying taxes if we throw any more money into this hole.
completely irresponsible, and i would say unconstitutional as well for the government to bail them out with no solid plans for returns on its “investment” using “our money”
Hopefully everything gets better soon
I believe it… what’s the last startup that actually added any sort of economic value? Surely not Twitter or Facebook, they’re just toys (although they’re toys I like to play with, they’re still just toys).
I’ve been saying this for a long time, this recession is going to weed out and kill those companies that don’t add any actual value to the economy. Shiny flashy things are fun to look at but people don’t pay for them.
people don’t pay directly for them, but they visit them daily and thus are subject to billing by proxy via advertisement revenue.
s’why they charge 7 bucks for a happy meal, got their banners on all the twitters and diggs
facebook wouldn’t do so bad if it went public, as a social utility it has a public presence already.
facebook and twitter are toys. i like that analogy. how about calling them “fancy answering machines.”
what we need are “solution machines” that get work done. the fun and games of the internet are over. “efficiency and productivity” must and will take center stage. I hope to hear the buzz word “B2B” again.
WorkLocator.com
I usually hate the wrd B2B, but I 400% agree. How many [web] startups in the past 3-4 years have actually made life easier through innovative solutions? mint.com maybe? amazon? oh wait – that’s from the last bubble….
How can we be so sure that there’s going to be a turn around?
Bubles do burst, i.e tech buble, Ûber-financial securities wizardry bubles etc., they come and go, hurting many when they pop, making a few people rich before. I beleive in a cosmological constant called greed, Greed inuced bubles are rising as we debate a USD700b plus band aid. (Is social-networking a buble?)
no. no many ppl got rich from this yet.
With liquidity drying up, VCs are panicking. Many of the recent startups in the Web 2.0 are not really “IPOable”. Their only hope is sale to Tech gaints like Google. However, there are many “me too” startups doing the same things. This housing and credit crisis downturn is going to last much longer than dot.bomb. There are so much bad loans (toxic wastes) in the system that it takes years to unwind. Right now, burn rate is the key for startup. Burn Baby Burn.
let’s all do a little experiment.
nobody pay your credit card bill or mortgage this month. also, sell all your stocks, and take all your money out of the bank.
i have a good feeling about this.
People of the Universe.
Imagine building a company to last. Fuck the exit strategy and fuck the VCs.
Whoa…
this kind of thinking will be the return paradigm, the building a company to last part.
So how long will this last, and what should startups looking for an exit do in the meantime?
It will probably not get better for a while with the financial situation in america. I guess nobody will be prepared to take to many risks until the economy is somewhat normal again
good time for startups. bad time for vc. its going downhill, but hopefully the valley isn’t too long that we can hit the next mountain base.
http://gatesand...s.blogspot.com/
Realistically this has been foreseeable for tech companies for a while. With the many start-ups that have no business models, it was only a matter of time til they went bust. The financial crisis just increased the speed of which they’ll go under.
Peter
http://www.thewebwar.com
Two issues here. SOX and performance.
Let us not forget SOX costs, which have definitely dinged the number of IPOs. It takes way too much money to stay compliant, therefore M&A is so much hotter option.
But at the same time we should look at simple issue of performance of those start-ups. They get their VC money and go on the spending spree. Lavish benefits, needless expenses, and overly optimistic hiring are very few of the issues. Some feel that investors are endless bags of cash. Now VCs are cracking down on that and we see more turnaround clients. But sometimes it is just too late. VCs have more dogs in their portfolios these days, because too many turned a blind eye to the problems.
Just my humble 2 cents.
Apolinaras “Apollo” Sinkevicius
Revolve, Inc.
Flexpertise(TM) – Business Law – Capital
http://www.revolvethis.com
Uh huh. Try starting a bio tech business without any VC. Or hell, any business but a Web startup that requires a capital outlay.
As the financial market needs government aid, web 2.0 market needs Google aid. It’s time for them to reinvest the huge amount of money they have made in these 10 years.
Maybe it’s time to go global to emerging markets.
The current situation would affect VC investements in startups and I think now is the right time to think of going global
Btw it seems some VC funds are getting fatter and it makes sense since investments are diverted from wall street … Of course that wouldnt apply to VCs backed by IBs.
http://www.redh....com/Home/24096
http://dondodge...-in-boston.html