Venture Report

According to the Exit Poll report by Thomson Financial and the National Venture Capital Association, venture-backed companies racked up $8.63 billion in disclosed value exits in the third quarter of 2007. Through the first three quarters of the year, venture-backed companies have yielded $23.3 billion in value, topping the $21.8 billion in all of 2006 and the $20.5 billion total in 2005.

A similar report — the Quarterly U.S. Liquidity Report — released by Dow Jones VentureOne, put that number even higher with $10.5 billion in M&A transactions and $662.5 million raised through initial public offerings.

According to the Thomson/NVCA Exit Poll, the third quarter logged 67 M&A deals. Of that number, only 34 had a disclosed value, totaling $7.7 billion: a 104% increase from the year-ago quarter, when 41 disclosed deals rang up $3.8 billion in value. Additionally, the average disclosed acquisition value was at its highest level since the fourth quarter of 2000.

Tech buyouts were the most prolific, as 45 deals with disclosed values garnered approximately $3.8 billion, while life sciences and other sectors accounted for $1.2 billion and $2.7 billion of the total dollar volume, respectively.

The slow summer months followed by a volatile stock market in September chocked off what had been a hot venture-backed IPO market. Only 12 companies went public, raising $945.2 million in the third quarter, a significant drop-off from the prior quarter when 25 offerings raised $4.1 billion.

The largest IPOs of the quarter were Masimo Corp.'s $202.6 million offering in life sciences and Athenahealth Inc.'s $113.2 million issue for the tech sector. Athenahealth has gone on to become one of the best-performing IPOs of the year, gaining 88% from its offering price.

In spite of the recent slowdown, the profits that venture firms are reaping on IPOs of their portfolio companies appear to be rising, as the public markets are putting increasingly higher valuations on VC-backed offerings, according to John Taylor, vice president of research at the NVCA.

"The valuations of companies able to go public is quite strong. In 2005 the median IPO valuation was $203 million; in 2006 it rose to $255; and for the three quarters of this year it's $365 million," said Taylor. "The median we're looking at now is higher than any year on record; it's actually higher than the median valuation at the height of the [tech] bubble for the full year."

Part of that rise can be attributed to self-selection, as Sarbanes-Oxley makes it harder for smaller companies to go public. But on the flip side is the rebound in IT spending in corporate America.

"IT was in the doldrums until around 2003, so we have a lot of companies that only really started selling products in 2003-2004 and are now are coming into their maturity," Taylor continued. "There is an increasing supply of these companies that are at the point in their maturity cycle where they're good candidates to go public."

In addition to the rising valuations, there is a huge number of venture-backed companies poised to go public. The NVCA reports that there are currently 72 venture-backed companies in registration with the Securities and Exchange Commission, while the VentureOne report said that in the third quarter another 46 venture-backed companies (including 22 healthcare companies) filed to go public, further setting the stage for a blockbuster fourth quarter.