2010 VC outlook: exits up, fundraising down

VCs predict 50 or more IPOs and a big uptick in acquisitions, even as many VC firms bite the dust.

A panel of top VCs at the AlwaysOn Venture Summit in Menlo Park Tuesday morning said both IPO and M&A activity would bounce back in 2010, but that venture firms themselves should not expect an easier fundraising environment, as LPs will hold steady with a pullback from venture capital. DCM’s Dixon Doll suggested 40 to 50 venture-backed companies would IPO in 2010. Bessemer’s David Cowan concurred with the number, and IVP’s Todd Chaffee was even more bullish, saying the good performance of this year’s IPOs would attract interest from institutional investors, and that a look at the last ten years suggested pent-up demand would push the number higher. In 1999, there were about 250 venture-backed IPOs, followed by 200 in 2000, a few years of 20 or so. After only 7 in 2008 and the same number so far in 2009, the next year will make up for the last two.

However, higher IPO numbers still wouldn’t bring back an ideal balance between IPO and M&A, Doll said. This year, about 90% of the exits were through acquisitions, and he expects that to continue. Both Doll and Chaffee held that big corporations were keeping large amounts of money on the sidelines, which the may regret not having used this year as valuations are poised to increase over the next several months. As the IPO market opens back up and valuations turn the corner, the corporate buyers will feel pressure to buy.

Nonetheless, the outlook for venture firm fundraising remains bleak. As Chaffee put it, “LPs are like tankers; they turn very slowly.” The liquidity problems at endowments remain, and they are still none to happy with venture returns. The LPs “are saying, ‘don’t come to us for money. We’ve been giving you money for the last six to seven years, and we haven’t gotten a lot back,’” Canaan’s Deepak Kamra said. He predicted that a lot of smaller funds that don’t have big star companies set to exit will go away.

Though Hummer Winblad founder Ann Winblad suggested the same players would remain in the VC industry, but the names on the door might change, both Chaffee and Cowan said they were unlikely to take new talent into their firms—bringing in a partner takes a lot of training time, and firms are not necessarily in need of more people.