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A House of Cards
Eileen P. Gunn
04/01/2004
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More important to us
as investors is the fact that valuations finally appear to be firming after
bottoming out in 2002. The average size of the deals in which values were
disclosed was $61.4 million for the first three-quarters of 2003, up from $54.7
million in the year-earlier period, according to Thomson Venture Economics data.
This also suggests that more whole, viable companies are being sold—rather than
assets of businesses about to go under, as had been the case for a time.
“Acquisitions are how most of the exits happen, so the fact that there have been
some interesting valuations suggests things are getting better,” Wood says.
Valuations and Trust
Financial advisors report that some of their clients
have been inquiring about ways to get back into private equity, venture capital
and related investments, and at a recent conference VentureOne held in New York,
institutional investors also indicated they would welcome the venture firms that
come to call later this year. That does not mean fund-raising will be easy. The
industry as a whole still has missteps to account for and trust to earn back. In
particular, firms need to improve how they evaluate and report their performance
if they want our money.
In a strong market, venture capital firms typically spend the first three years
of a fund’s life investing, years three through six or seven doing follow-on
financings, and exit in years four through eight. Completely unwinding a fund
can take 10 to 12 years. But in the last several years, it has taken funds much
longer to invest their capital, and exits have been scarce. |
“Venture capital firms were too aggressive in valuing
companies up during the bubble, and didn’t write them down quickly enough when
things fell apart,” says Jesse Reyes, director of the U.S. branch of Thomson
Venture Economics.
This happens more easily than one might expect. A company
will raise money, generating an overt agreed-upon market value, every two or
three years. In the interim, venture firms have to trim that company’s value if
certain definitive events occur, such as the loss of a key patent. But short of
a few defined events, investors are relying on their venture capital firms’ best
judgment in raising or lowering values as a company evolves.
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