A Mouse That Roars

We’ve seen a very large jump in the number of companies that have registered their intention to go public with the Securities and Exchange Commission. This number had really stayed in about the 30 range for a very long time, but it was up to 72 in the third quarter of 2007. Back in 2004 when we had 57 companies in registration, a lot of those were really for sale. They were basically saying to investors, ‘I’m Sarbanes-Oxley compliant, please buy me.’ Today, the companies that are in registration truly want to go public, though some may get picked off as an acquisition.

I think some very good companies will go public over the next couple of quarters. So while we would love to see 110 or 120 in IPOs a year, and we’re no where near that at this point, we’re certainly better than we have been over the last two to three years.

The acquisitions have been an interesting story. They’re pretty consistent year after year, but we had a substantial drop-off in the second quarter of 2007 in the number of acquisitions. And there was a lot of talk: ‘Is this all because of the subprime issue? Is it because of the erratic stock market?’ I honestly don’t think it’s either of those things. I think that some companies are just digesting the companies that they’d previously bought. We did have another drop-off at the end of the third quarter. But what we saw, particularly in the third quarter, were very strong acquisitions—sellers were getting good prices for their companies. While we’re not seeing as many acquisitions, the ones that are happening are actually making both the venture capitalists and their investors very happy.

I don’t know what we’re going to see in the near future when it comes to the M&A process. I’ve heard arguments on both sides that companies are basically very skittish. Those who have money might be holding back, because they don’t know what the market is going to be over the next six months. If you don’t have the money and you have to go back and borrow it, it’s harder to do that. I’ve also heard just the opposite: Acquirers are out there and they want to buy. So the jury’s out. At one point, about 90 percent of companies were going the acquisitions route as opposed to the IPO route. Now, we’re seeing about 25 percent of companies going the IPO route. We’d certainly like to see this get higher, but it’s a positive trend.

I think it’s important to talk about the bubble. People talk about the tech bubble as if it’s over, and the reality is that the impact of the bubble is just beginning. When you look at companies that were funded between 1991 and 2000, 35 percent of those companies are still being funded by venture capitalists. We’ve got 4,000 companies out there that we have continued to fund all through the bubble.

When you’re only seeing maybe 75 IPOs a year and maybe 300 to 350 M&A transactions and you’re sitting on 4,000 companies, what’s going to happen? That’s a lot of companies. The impact of the tech bubble is going to be hitting over the next six months to a year, I think, as decisions are made about what to do with some of these companies. We’re going to have to get rid of these companies, or these companies are going to have to be acquired or go public. It is an important part of the equation.

Lastly, I think it is important to touch on public policy. There is going to be very little done in the U.S. Congress, as the election season begins in earnest. And things that we truly thought we had a chance at having some positive reforms on, particularly immigration, have fallen by the wayside. We may see something in patents. We have a carried-interest issue for venture capitalists that remains at the forefront. We have issues with the small business agency. We have issues with the FDA. A lot of these things are going to be put on the back burner for a year until the November 2008 elections. That’s going to hit entrepreneurs and it’s going to hit venture capitalists. It’s important that when you’re doing deals to keep these public policy issues in your mind, because they do impact you at the end of the day.