Legal. VCs (And Startups) Won’t Be Immune To The Credit Crunch. So far the downward spiral of credit and financial markets seems to have left venture capital firms and startups relatively unharmed.
Even though the IPO market closed completely in the second quarter (and opened again only slightly in the third), venture capital firms continue to raise money and invest in startups at a healthy pace. During the first half of the year, venture capital firms raised about $16 billion in 141 funds and invested about $15 billion in nearly 2,000 deals. But it is not clear how much of those funds already raised can be counted on. Generally, the investors in a venture fund (the limited partners) commit a certain amount of cash to each fund, but only pony up the cash when the VC fund needs it to make an investment. With wealthy individuals taking losses in the stock, credit, and real estate markets (the stock market is sharply down this morning, and even hedge funds are not safe), VC funds are already beginning to feel the trickle-down effects.
No Exits. Liquidity Dries Up Even More For VC-Backed Startups In. 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. What Will Happen to Lehman’s Startup Orphans? As Lehman Brothers sells off its assets following its bankruptcy, there is still a big question as to what will happen to its venture arm and, more importantly, how any change in ownership will affect the companies in which Lehman Brothers Venture Partners holds a stake.
Like many investment banks, Lehman got into venture investing in the mid-1990s to try to capture some of those venture returns. The investment management group that it was a part of was sold off to Bain Capital and Hellman & Friedman on Monday, but the venture arm was not part of that sale. Instead, Lehman Brothers Venture Partners is trying to spin itself off as a separate venture firm with about $800 million in assets. But if it cannot do that, it will either go to hungry creditors or a financial buyer who may be more interested in liquidating the fund than in nurturing the startups in its portfolio.
Those startups include Kayak, SearchMe, Jaxtr, Endeca, and about 80 more.