I recently talked to an entrepreneur and asked him how much his company raised in venture capital financing. I thought he said $50 million, but he corrected me — it was $15 million.
It sounded low, considering I was getting used to hearing about $50 million-plus rounds. Probably just another sign of the bubbly vibe in Silicon Valley.
But now, it looks like that fervor is cooling off. Perhaps the main reason is that VC deals have not fared particularly well in terms of acquisitions and IPOs. According to a recent piece in the IPOPlaybook, I pointed out that the average return for social public offerings last year came to a sorry -29%. Even top-notch players like Pandora (NYSE:P), LinkedIn (NYSE:LNKD) and Groupon (NASDAQ:GRPN) have seen double-digit declines.
A report from VentureSource provides further confirmation of the liquidity issues. For 2011, there was a 14% drop to $53.2 billion in mergers, acquisitions, buyouts and IPOs. Yet firms still were able to increase capital raised by 26%.
It’s certainly a big disconnect, but it cannot last for long. As returns falter, investors in VC funds — such as endowments, pensions and other types of institutions — will start to rethink their allocations.
Consider one of the most aggressive VCs, Marc Andreessen (who operates Andreessen Horowitz). He says he is pressing the “pause” button on fundings, according to a piece in The Wall Street Journal. Interestingly enough, he probably has little choice — I’m sure his investors are making it vividly clear that a change is needed.
In Silicon Valley, fundings can freeze up quickly. It’s the nature of the business, which tends to go to extremes. But ironically enough, a slowdown could be good news for large VCs. After all, they already have invested heavily in their portfolio companies — like Twitter, Dropbox, Airbnb and Facebook — which should put them in a strong competitive position, as their rivals will be starved for financing.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.
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