When I first started in the venture business in late 1999 the market was hot and deals were getting done very quickly, and with hindsight some of them were done too quickly and without enough analysis. Investment memos were briefer then than they have become since and I remember people joking that in the ‘exit strategy’ section there was often little more than “This company will exit via M&A or IPO”.
When the market is hot exits happen and maybe more analysis than that would have been hard to justify. These days things are different though, and we spend time thinking about who might acquire any given company, what the rationale would be, how it fits with their strategy, how it fits with other acquisitions they’ve made, as well as about the potential for an IPO.
More recently we have begun analysing how other liquidity options can enhance the returns of our funds – from private equity, and in the last few months from secondary markets. Sarah Lacy wrote a post on Techcrunch a couple of days ago that discusses both these additional sources of liquidity.
There has been more activity in the US than in Europe in both these areas, but they are starting to happen over here. The folk from Second Market are now actively courting European companies and we are seeing increasing interest from private equity funds in getting to know our portfolio, and had our first PE backed exit last year. Interestingly, the PE guys have started talking up their ability to pay high multiples.
It is early days for both secondary markets and venture backed exits to PE but both of these are positive trends. The absence of liquidity has been hurting venture funds the world over, and when venture funds hurt their LPs hurt, and when LPs hurt they invest less in new VC funds which means less money for startups.