Private equity firms, already reshaping wide swathes of American business, are poised to begin shaking up the venture industry, too.
In a new survey of venture capitalists’ 2007 predictions, 71 percent of the 200 individuals polled by the National Venture Capital Association said that selling their startups to these giant buyout firms may become an “attractive option” next year.
It’s a dramatic shift; the worlds of venture capital and private equity have rarely interacted.
Private-equity firms typically buy mid-size to large companies — public or private — with an eye toward selling for at least twice their intial investment within a few years, while VCs mostly invest in nascent, unproven companies, hoping for bigger payoffs on smaller investments.
But venture investors have been overshadowed by ever-ballooning private equity firms and believe it’s inevitable that some of the capital sloshing around the buyout world will find its way to them.
According to Dealogic, a New York-based outfit that tracks M&A activity, private equity firms have so far this year spent $376 billion to purchase 766 firms in the United States, the vast majority of which have been privately owned companies. The figure is roughly three times the $129.6 billion that private equity firms shelled out last year to acquire 721 companies.
“For firms like mine, it’s great,” said Charlie Rothstein, a venture capitalist with the investment firm Beringea, which has offices in Detroit, London and Los Angeles. “My options used to be to sell to the trade,” meaning to acquisitive companies like a Google or Computer Associates, “or to try and take a company public.”
IPOs had long been the preferred way to “exit” venture investments, but VCs say that taking a company public has become more difficult, largely owing to tougher SEC regulations.
“Now, with this massive population of buyout funds scratching around for any deals they can find, we’re all going to start benefiting,” said Rothstein.
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