VCs to Public Market: You’ve Got Great PIPEs, Baby

Hard hit by Wall Street’s collapse, devalued public companies are proving too irresistible for VCs to ignore.

“We’ve seen a dramatic uptick in interest by venture capitalists in small cap issuers,” says Steve Fletcher, a managing director at GCA Savvian in San Francisco, who says his investment bank began receiving “many more calls” from VCs beginning in November and December.

“Especially in life sciences and technology, we’ve seen a proliferation of venture firms, coming to us and saying, ‘We’d love to see the PIPES you’re doing,” says Mark Weissman, vice president of equity capital markets at the investment bank Jefferies & Co. “We’ve done a dozen PIPEs in the last couple of months.”

PIPEs (private investments in public entities) have never been something that VCs are terribly eager to brag about. After all, venture investors are supposed to be focused on private companies that they can grow and then take public or sell to an acquirer. It’s why their LPs sign on.

Still, most firms’ mandates allow them to make investments in public companies for good reason. The dotcom collapse, which knocked the wind out of the broader tech sector, was one of those times when VCs would’ve been crazy not to invest in some of deals to be had. The current economic meltdown, which is far more broad and severe, is making cash-strained public companies — many with strong management, healthy revenues, and yes, sustainable business models — even more compelling.

As Chad Kinzelberg, a director at Scale Venture Partners, explains, “If you do a simple screen and say, gee, great PIPE candidates are companies that enjoyed 10 percent growth last year, are trading at a reasonable multiple and have $200 million in revenue, I can tell you unequivocally that dozens of companies fall into that category because the markets aren’t valuing companies on their long-term prospects right now.

“A couple of years ago,” he adds, “you wouldn’t have found anything [meeting that criteria].”

Scale hasn’t pulled the trigger on a deal yet. In fact, the last time it invested in a PIPE was in 2000. But like a lot of firms — including Benchmark Capital, which told me of its interest in PIPEs back in October — it’s looking.

“PIPEs aren’t an integral part of our strategy,” says Kinzelberg, sounding very much like a typical venture capitalist. “But they’re now something on our radar screen. In spaces where we’re pretty active, there are some big market opportunities and a lot of public companies in need of cash.”