Venture sector set to bounce back

(July 8, 2004) Venture capitalists are poised to start cashing in their positions, ending a three-year dry spell, as the economy improves according to David Ferguson, managing general partner of VenGrowth.

In the late 1990s, venture capitalism was in a golden era. Deal sizes averaged over $24 million and venture capital (VC) firms were competing to fund “the next big thing.” Although valuations are firming up now, when the tech bubble burst, valuations plummeted, with funding deals dropping to an average of $10 million.

The stock markets tanked and the appetite for initial public offerings, mergers and acquisitions dried up almost overnight.

Ferguson says while the equity markets were suffering, investors were more willing to forgive the poor performance of VC funds, since most other investments were in the same boat. The criticism started mounting, however, as the equity markets recovered and VC funds appeared stagnant.

Questions started to arise: Why were the venture capitalists underperforming in such a booming stock market?

Such critiques were unwarranted, according to Ferguson, and showed a lack of understanding on the part of the critics.

He says the exit market is now starting to pick up, thanks to the upturn in the economy. VenGrowth prefers to exit its positions through acquisitions, rather than IPOs and during the down market, the large companies that typically buy its investments had avoided research and development spending.

After a solid 2003 for equity markets and all signs pointing toward a global economic recovery, large companies are once again starting to look at the merger and acquisition market.

So far, the recovery has been choppy, with exit deals coming in fits and starts, but Ferguson says this, too, is typical of the early stages of a recovery, as acquirers are reluctant to go on an unbridled shopping spree without further signs of the economy firming.

He says acquisitions in the software sector are starting to improve, with profitable exits becoming easier with the next six months to a year. Software is typically the first sector to improve, as corporations upgrade their technology, seeking to improve efficiency as the economy gears up. He expects the communications market will follow suit, but at a slightly slower pace.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com