New Exit Door Opening

The National Venture Capital Association recently released data highlighting that Q1 2010 VC fund raising dropped 31% from Q1 2009, to $3.6 billion.  Upon reviewing the data, technology blog TechCrunch wrote that “Until exits pick up again, investors will remain cautious on venture capital as an asset class.”  First, let’s take a look at the data in terms of total funds raised by quarter over the last two years.

A different perspective is looking at the quarterly change in funds raised, relative to the same quarter in the previous quarter.

The funds raised by VCs dropped again in the first quarter in 2010 relative to the Q1 2009,  which had already dropped significantly from Q1 2008.  However, if I were a VC I’d be heartened by two facts.  First, traditional exits for VC’s picked up dramatically in Q1 2010 compared with previous quarters.  The chart below shows exits via M&A (per Thomson Reuters):

In addition, IPO volume picked up in the first quarter, with information technology (4) and biotech (3) leading the charge in terms of number of IPOs:.

The second fact that should be ncouraging to VCs is the emergence of the secondary market as a third option for exits.  All three “exits” are rife with peril.  To paraphrase a recent comment from Zynga’s CEO Mark Pincus, “Going public is not an exit its an entry”.  Inferring that it’s an entry in to a new hell with rules and regulations and costly filings and mindshare suck for management.  In a merger, the VCs are happy, but management now has a new boss with limited context, and the usually leave and their baby withers (MySpace being the classic example).  The issue with the selling of shares in the private market is the mis-perception that the seller must know something bad about the company or must not care about the company (if its an employee).  Why is selling shares in the private market perceived so differently differently than an IPO or merging?  Its perceived differently because its relatively new.  However, the companies leading the social media revolution (e.g. Facebook, Zynga, LinkedIn, Twitter…..) have all seen dramatic increases in interest in buying their shares in the nascent private market , The fact is, selling shares in a private market transaction is a win for everyone, and the sooner everyone opens their eyes to that fact, the faster our little ecosystem of private shares will grow.

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