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Third Quarter Results

Posted by Dave Broadwin on November 02, 2009

There is a frenzy after every quarter during which various blogs and others comment on the industry numbers as they come out. We are about to publish our next issue of EEC Perspectives (I will post a link when we actually publish.) Unfortunately, most of the news is not good: fewer funds raising less money, etc. Mike Feinstein's recent blog sums it up nicely.

While I don't think there is a limit to entrepreneurial innovation (good ideas around which good businesses can be built), I wonder if there is a limit to the rate of absorption (the rate at which the world economy can embrace good new entrepreneurial businesses). If there is, then this rate would define the outer limits of what entrepreneurs and the people who invest in them can achieve at any given moment.

I can't believe there is a scientific way of figuring out what the rate of absorption might be, but it might be possible to have a subject insight into it. Unfortunately for me, one of the best things that can happen to my clients is to be acquired by some Fortune 500 company. (I say unfortunately for me because they then cease to be my client.) However, in the process I get a glimpse of how the largest companies in the world integrate newly acquired companies and technologies into their existing operations.

Integrating newly acquired companies is a real challenge, even to the very largest companies. As a result even Fortune 50 or Fortune 5 companies can only do a limited amount of it. So, I suppose you could figure out what a company the size of Microsoft, IBM, Google or GE does in a year and extrapolate from that. You would have to include the possibility that some of these companies remain stand alone companies.

My hypothesis is that there are not now (nor indeed have ever been) enough exit opportunities or opportunities to exist as profitable stand alone companies to support the size of the venture capital industry as it existed in 2007 (and probably now as it exists now).

In a way this approach is just looking at the problem "from the other end of the telescope" from the paucity of returns and the incredible shrinking number of funds and amount of dollars being allocated to them.

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Dave Broadwin Partner

Dave heads the Emerging Enterprise Center. His practice focuses on representation of technology companies from start up to exit. Dave also handles venture financings, merger...

Prithvi Tanwar Associate

Prithvi Tanwar is an Associate in the firm’s Business Department. His practice focuses on advising emerging life science and technology companies as well as U.S....

Q1 venture activity levels and what will Q2 show?

It has been a long time since I wrote a blog post. In part, I just ran out of steam. In part, I have been running non-stop since May. Why? Because business has picked up in a major way. Since May the pace of financings and exits has picked up in a very noticeable way. So, here is a prediction, when I write the comparison of Q2 deals published by by Foley Hoag, Fenwick, it will show a major jump from the Q1 numbers.

Here is what my partner, Dave Pierson, had to say about Q1 activity, “The total number of New England Series A transactions dropped 46% from Q4 …. The total number of New Englsnd Series B and Later round transactions during Q1 decreased 21% from Q4…”

Fenwick had similar observations. Fenwick had this to say, “Venture capitalists invested $6.4 billion in 661 deals in the U.S. in 1Q11, compared to $7.6 billion in 735 deals reported in January 2011 for 4Q10, according to Dow Jones VentureSource (“VentureSource”). Although this represents a 16% decline in dollars and a 10% decline in deal volume from 4Q10, the 1Q11 results were generally flat with the average of $6.6 billion raised per quarter in 2010.”

All I can say is that either Foley Hoag is lucky or the venture world took off in Q2.

Here is the open question, given the turmoil in the public markets, will I have written plenty of new posts and be lamenting the amount of time available for such pursuits?

Without further adieu, below is the same table I produce each quarter. This is, of course, a table reflecting Q1 activity.

Term	Foley Hoag New England Series A	Foley Hoag New England Series B and Later	Fenwick Silicon Valley All Series
Cumulative Dividends	42%	52%	8%
Preference with Participation	42%	35%	43%
Redemption	85%	82%	20%
Pay to Play	15%	40%	5%

There is no surprise in these numbers. They have followed a consistent pattern from quarter to quarter for as long as I have been tracking them. Note the greater frequency of dividends and redemption provisions in New England deals. Having wondered about why there is not convergence on terms, given that so many of the leading venture firms do deals on both coasts and having asked a number of people in the business about it, I have come to the conclusion that it the divergence in these terms reflects a basic cultural bias. New England just has more of a lender mentality than the Valley.

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