January 7, 2009
This is a post I wrote for our PJC firm blog, but represents my own personal point of view about 2009 as well.
For many of you it will come as no big surprise that 2008 saw some of the lowest levels of startup exits in a number of years. IPOs were at their lowest in 30 years, with just six for the full year and none in Q4 2008 when the economic and financial contraction hit top gear. Check my math, but I’m pretty sure that if you annualize zero it’s still a pretty low number. Far more companies pulled their IPO registration filings than actually completed public offerings. M&A activity was only marginally better, down more than 50% in dollar terms over 2007 according to Dow Jones Venturesource.
So 2008 was clearly bad… I get it. At Point Judith Capital we were fortunate to be investors in Optasite, one of the five largest acquisitions of VC-backed companies in 2008. Of itself this is obviously a great thing along with other notable outcomes last year (EqualLogic acq by Dell, Rackspace IPO, Bebo acq by AOL, BillMeLater acq by eBay). And obviously 2008 saw dramatic swings in virtually every investment class from equities to commodities to fixed income (excl. US Treasuries) and of course real estate. But no matter how you slice it, 2008 was not a good year for startup exits.
The question many of us in the startup ecosystem (and all of us in VC community) are of course asking is what will happen in 2009 and beyond. I assiduously avoid making predicitons at the start of the year, not simply because it’s trite or because you often end up being wrong if anybody bothers to go back and look at what you forecasted. But given the tumultuousness of late 2008, making predictions about 2009 is truly a crapshoot even for the wisdom of crowds (PDF link). My gut sense is that among the three big buckets of VC investing (IT /digital media, healthcare / life sciences, and cleantech / alternative energy), exits for healthcare companies may be the strongest in ’09 with some continued weakness in IT and most cleantech companies still comparatively immature to see lots of exits at this point. The honest truth though is that nobody knows for certain how this year will pan out.
What we do know for certain are the principles that have held true for decades:
- Profitable (in cashflow terms) startups can always sustain themselves without additional equity capital
- Promising startups, with large market opportunities being built by exceptional entrepreneurs, will still get funded
- The IPO market will return… perhaps not in 2009, maybe not even in 2010, but barring massive new regulation even more restrictive than SARBOX it will eventually bounce back
- Large public companies will still see rapidly growing startups, with innovative technology, as valuable additions to their businesses
As early stage VCs, focused on empowering innovation, we are by definition long term investors. Savvy entrepreneurs are long term thinkers too, making sure they raise sufficient capital (or intelligently shepherding the funds they already have) to make it through challenging times. What I can say with conviction about 2009 is that if all of us in the startup ecosystem stick to time tested principles like these, we will all undoubtedly create meaningful value this year regardless of when or how it is ultimately realized.