SAN JOSE, Calif. — The second quarter of 2009 was the worst for making money on venture capital deals in six years, according to a new study from Dow Jones VentureSource. So called liquidity levels for startup companies plummeted 57 percent from $6.48 billion in the second quarter of 2008 to $2.8 billion in the last three months, the market watcher said.
The return of initial public offerings after a nine-month draught provided one ray of hope in the latest numbers. Three venture-backed companies went public in late May and June, raising a total of $232 million. In the prior 13 months, only one other VC-backed company completed an IPO.
SolarWinds (Austin, Tex.), a developer of network management tools for businesses, raised $113 million in May in the largest of the three IPOs. All three were software companies, one focused on medical technology.
The good news is the overall decline in liquidity appears to be slowing. For example, the number of startups acquired has fallen about 10 to 15 percent a quarter since the fourth quarter of 2007 when 122 startups were purchased. But the number of acquisitions in the past three months (67) was just three fewer than in the first quarter of 2009.
"I think this is either the bottom or its getting close," said Jessica Canning, director of global research for VentureSource.
In addition, "the IPO window appears to be opening," said Canning. But the IPO market "will be very hit-or-miss over the next several quarters, probably [focused on] later-stage, revenue-driven companies," she added.
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Mergers and acquisitions remained the dominant source of venture money in the latest quarter. Such deals generated $2.57 billion for 67 startups in the second quarter, a 60 percent decline from the $6.48 billion raised in 89 deals in the same quarter in 2008, the previous lowest level for M&A deals since 1999.
Cisco Systems' $590 million purchase of Pure Digital (San Francisco), maker of the Flip Ultra, was the largest startup acquisition of the quarter. Cisco's purchase for $105 million of Tidal Software (Palo Alto, Calif.), a maker of workload management software was the second largest deal.
According to VentureSource, the overall median amount paid for a venture-backed company in the second quarter of 2009 was less than $22 million—a 46 percent drop from the nearly $41 million median paid during the same period in 2008.
Startups acquired in the latest period raised a median of $16.3 million in venture capital before they were sold. That's 30 percent less than the median of $23.4 million median in the same period last year. However, the median amount of time it took to strike an acquisition deal was 4.5 years, 25 percent less time than the six-year median in the second quarter of 2008.
"This is the second straight quarter of reduced time to an M&A, marking a potentially emerging trend for this source of liquidity," said Canning.
