Collective fantasy

Exit market got you down? Be honest now. Why else would more than 70% of the venture capitalists surveyed by the NVCA say they expect to see more exits via purchases of their portfolio companies by buyout shops? When I first saw that survey, I thought we were on the cusp of a new trend.

There’s nothing journalists love more than a good trend story, so I immediately asked Senior Editor Joanna Glasner to look into it. I also called my friends over at Buyouts, another Thomson Financial pub, to see if they’d heard anything about it. Buyouts Managing Editor Mark Cecil was skeptical, but he said he would look into it.

A dozen interviews later, Mark and Joanna reported that they hadn’t found a single source who expected a significant number of acquisitions of VC-backed companies by private equity firms. (See the story on the next page.) Venture-backed companies typically don’t have the earnings or cash flow that buyout funds are looking for. Drew Lanza of Morgenthaler gave a typical response: “I would love to have buyouts firms stepping into this breach and saying ‘I will buy your firm lock, stock and barrel,’ but I don’t see that happening.”

One factor that may be coloring perception is that there has been a stunning increase in buyouts. Private equity firms participated in 35% of the M&A of U.S.-based companies last year, up from 23% in 2005 and a 10-year average of just 17%, according to PricewaterhouseCoopers.

And when you factor in the number of huge buyout funds that have been raised recently, it just makes sense that the PE funds are going to be very active in putting that money to work. But it’s a real stretch to take that to mean they will add VC-backed companies to their shopping lists.

It would appear, then, that the folks who answered “Yes” on the NVCA survey were really saying “I hope.” It’s understandable, especially when you consider that there was just a single VC-backed IPO in January (compared to two in January 2006 and 10 in January 2005).

There’s no harm in hoping that buyout shops will come to the rescue of venture funds desperate for an exit. Just don’t count on it actually happening.