Venturing into the market
By Karen Gibbs
April 29, 2004
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Deal me in.
It's a phrase poker players use when they want to sit at the table and join a friendly game of poker, and it could also be what venture capitalists are saying after a recent drought of deal-making activity.
Although it offers the promise of great rewards, venture capital investing is also highly risky, and after the burnout of hundreds of dot-com companies precipitated a bear market, venture capitalists in recent years became cautious about, if not downright leery of, yet another high-stakes venture with little or no payoff. But maybe VCs are becoming a bit more encouraged by events such as the search engine provide Google's plans for an initial public offering; according to documents filed today with the Securities and Exchange Commission, Google hopes to raise up to $2.7 billion from the public market.
The filing doesn't provide any dilution information, so it's impossible to see what kind of public market value Google is estimating for itself. But some observers believe the company could be worth as much as $20 billion after going public -- that wouldn't be a bad return on original Google stakeholders' initial investment of $25 million back in 1999.
Widespread anticipation of Google's offering has overshadowed a resurgence in overall IPO activity this year. And while it pales in comparison to the dot-com frenzy of the late '90s, activity has been respectable. For the first quarter of 2004, venture capital investments totaled $4.6 billion, down from the $5.2 billion seen in the fourth quarter of 2003, but a 9 percent increase from the same period a year ago.
Why is this important to the individual investor? Because it reflects a rising level of optimism about the economy in general and capital markets in particular. Sometimes you may be investing in venture capital projects and not even know it, especially if you like biotech or pharmaceutical stocks. According to the PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association Money Tree Survey, Life Science Companies (biotech and medical devices combined) continue to dominate other industries. First quarter investments in that sector totaled $1.3 billion.
The single largest industry category investment was software, with $956 million going into 162 companies. Even the much maligned telecom industry is seeing interest with $547million going to 65 companies.
But there are some signs that all this optimism may be déjà vu all over again. The current pervasive optimism is reminiscent of the buildup to the bubble, when money was thrown at ideas without any consideration of a business plan, product, or bottom line. And while Google may provide a light at the end of the tunnel, even the most successful venture capitalists are urging caution.
In fact, those venture capitalists are gingerly stepping back into the market. They are more willing to support mid- and later-stage financings than offer new ventures: First-time or early-stage financings were essentially flat, according to the Money Tree survey, reflecting the bad taste that still lingers from the 2000 bust.
There is also lots of money out there, sitting on the sidelines, ready to go to work. Venture capitalists are finding it easy to raise money, with people literally throwing money at them. With that much money and the cavalier attitude that this is a fairly easy way to make money almost guarantees that some bad deals will get financed.
But many of these venture capitalists are the scouts for what's really hot down the road. They are the vanguard for the rest of us investment soldiers and their actions and insights deserve some attention.
We'll give you a chance to hear, straight from the players themselves, where the deals are and how you can get a piece of the action this Friday when we chat with Susan Woodward of Sand Hill Econometrics and Roger Novak of Novak Biddle Venture Partners.
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