The Logjam Bursts
While it is not clear exactly how things will play out, 2004 is shaping up to be the year the gridlock eases. Most fundamentally, observers see the economy improving in ways that matter to young, growing businesses. Notes Anthony Hoberman, head of venture capital investments for Alliance Capital Management, “Inventory levels are falling and corporate purse strings are opening up. The rate of technological change remains high, and America still maintains the edge in technology by a wide margin. These things are all good for agile venture-backed companies.”

Five years ago, a 2 percent per annum management fee would have been considered aggressive, but during the boom years that followed, it became common. Some funds charged as much as 3 percent. Will firms now retreat to the more traditional 1 percent to 1.5 percent range? This year’s fund-raising efforts will tell.

These positive economic trends Hoberman sees should pave the way for May and those like him to pour energy into growing their most viable businesses. More companies should be able to get the revenue and cash flow they need to hold up under the scrutiny of an IPO or acquisition. 

Moreover, as business conditions improve and valuations begin to rise, expectations for investments made during the market’s peak have lowered. As a result, investors harbor more conservative expectations that venture capital firms believe they can meet.

The revival of the IPO market is also salving our nerves. A growing number of venture-backed companies went public in each consecutive quarter of 2003, for a total of 29, up from 24 in 2002 (but still down, of course, from 245 in 1999), according to the National Venture Capital Association, a trade group, and Thomson Venture Economics, a data vendor. Mergers-and-acquisitions ran a little behind 2002 at the end of the third quarter of last year—215 deals in 2003 versus 230 the previous year—but this number usually fluctuates from quarter to quarter.