Venture-backed company exits rise

"Private, venture-backed companies must increasingly act like multinationals earlier in their life cycles, taking advantage of the new global ecosystem that matches the increased demand for innovation with an international supply of talent, technologies, business models and capital," Gil Forer, global director of Ernst & Young's Venture Capital Advisory Group, said in a statement.

Forer noted there has been an increase in collaboration among funds, as global investors seek local funds in emerging innovation hotbeds, to help them make the right investments and get a foot into developing consumer markets.

In the near term the US will continue to rely on mergers and acquisitions and more innovative strategies to achieve an exit. But Ernst & Young predicts market conditions will improve and investor demand for venture-backed offerings will result in more IPOs in both the US and Europe during the rest of 2006.

The emerging markets of China and India are being watched carefully. In China, for example, venture-backed companies initiated a second wave of successful IPOs on the NASDAQ. The first year of fundraising for China-dedicated funds ended with US$4 billion in committed capital.

Across the world, about $31 billion was invested in 2005. Of that, US investors put up $22.1 billion in 2,239 financing rounds. While there was no increase in the number of deals over 2004, there was a 2 per cent rise in capital, and later-stage capital rose to 49 per cent of the total invested, up from 44 per cent in 2004.

By comparison, Europe invested $4.25 billion (€3.6 billion) in 1,020 financing rounds. That's 5 per cent less capital and 16 per cent fewer rounds than in 2004. Paralleling the US, later-stage capital in Europe grew to 49 per cent of the total invested, up from 44 per cent the prior year.

Of the total $31 billion invested worldwide, 93 per cent was by the United States, Canada, Europe and Israel. The rest was by China and India. In Europe, the United Kingdom led investments with $1.2 billion invested in 307 rounds, followed by France, Germany and Sweden.

Bio and software dominate

Biopharmaceutical and software companies continued to dominate venture-capital investing in Europe and the US throughout 2005. Europe saw a rise in medical-device financings to €310.9 million invested, the most since 2001. New activity in investment also showed up in emerging markets in Europe such as alternative energy, in which investments rose 25 percent to €50.3 million in 2005. One example of a successful venture-backed energy IPO last year was Europe's largest, Q-Cells, a solar-cell developer that raised €313.2 million.

There also was a rise in financing for medical-devices companies in the US, which pulled in more than $2 billion in capital, the most in that segment since 2000. And $2.42 billion was invested in consumer and business-service companies, including Internet companies. This is the most money pumped into that segment since 2001, and it was a 53 per cent rise over 2004. That signals interest in Web 2.0 and other services, Ernst & Young said.

In terms of new money raised, venture capital firms in Europe closed on €3.7 billion Euros in 2005, more than double 2004. Those in the US rounded up US$41 billion in new funds in the last two years.

In Europe, venture-backed IPOs rose to 60 offerings, raising $2.4 billion (€2.03 billion), up 71 per cent in the number of transactions and 185 per cent in capital raised. In the US, 356 companies were acquired, for a total amount paid of $27.3 billion. That's up 17 per cent from 2004, with the median amount paid rising to US$23 million as more mature companies were acquired and competition among buyers increased.

Private exits

Another trend pinpointed in report is private equity firms buying venture-backed companies, providing an exit to venture capital investors. That seems likely to continue, the report says.

The challenge of meeting the requirements of the financial and accounting disclosure requirements of the Sarbanes–Oxley Act of 2002 in the US have made it more difficult for venture-backed companies to list on the NASDAQ, so they are looking elsewhere, including on global exchanges such as London's AIM and exchanges in Hong Kong and Tokyo. AIM has become the growing destination for growth-company listings, according to the report.

There is a continuing contraction in the number of private venture-backed companies in market segments such as information services, communications, consumer and business services and retailers in both the US and Europe. That's because positions taken during the technology boom are being traded for promising new opportunities in biopharma, medical devices, semiconductors, electronics and Web 2.0 companies.

Ernst & Young sees this rebalancing of venture capital portfolios as a positive sign for the future, because it opens the door for start-ups to attract investor attention. The expected shakeout in the venture capital industry, including a consolidation in the number of funds, is under way and will be healthy for the industry.