Venture industry endures liquidity drought

Liquidity event values via M&A drops 65% in first quarter 2009

In the second quarter, two IPOs are expected to debut. Language software provider Rosetta Stone and Changyou, an online video developer. This is twice as many IPOs as the one deal - Mead Johnson Nutrition (MJN) - priced in the first three months of this year.

With the IPO market still, for all intents and purposes, shut down, venture capitalists have to deal with one less exit opportunity. In fact, in nearly eight months there's not been a venture-backed company that's completed an IPO, resulting in the worse liquidity drought in history for VCs, according to Dow Jones VentureSource.

In the first quarter of 2009, VCs generated $3.2 billion in liquidity through mergers and acquisitions of 68 companies, down 65% from the $9.1 billion (for 104 companies) in liquidity events in the same period last year. The first three months of this year marks the lowest quarter since 2003.

In other words, mergers and acquisition deal sizes on average dropped by more than half in the first quarter to $47 million from $87.5 million. On a median basis, the amount paid for a VC-backed company in the first quarter was just shy of $22.1 million, down 63% from nearly $60 million a year ago.

"The most disturbing part about these new liquidity figures is that we’ve already reached the lows seen after the dot-com bust and we may not be at the bottom yet,” said Jessica Canning, Global Research Director for VentureSource, in a release. “The IPO market is totally closed and there’s just no clear indication right now that it will revive any time in the next quarter or two, even with 43 companies currently in registration.  It’s a tough time to be a venture capitalist – and likely even tougher to be an investor in a venture fund.”

(image source:  i.pbase.com)