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Venture Capital Firms Prune Their Portfolios --- Moves Help Keep Merger Activity Stable

09 Nov 2001 | Wall Street Journal pg. 20 | By Suzanne McGee.

Venture capitalists appear more eager than ever to dispose of their problem companies.

With valuations of these start-ups in the doldrums, and the market for initial public offerings of stock almost nonexistent, venture-capital investors are identifying a handful of potential winners in their portfolios, and trying to dispose of the rest, either by selling them or closing them down. That is why, despite the gyrations in the U.S. stock market over the course of the third quarter, the number of merger and acquisition deals involving venture-backed companies remained stable, according to data released by Venture Economics and the National Venture Capital Association. The NVCA is a Washington-based industry group; Venture Economics is a New York-based data firm.

The two organizations reported that 70 mergers or sales involving venture-backed companies took place between July 1 and Sept. 30. That is down from 76 in the second quarter of this year, but up from 62 during the third quarter of last year.

Of the 38 transactions in the third quarter of this year where deal valuations were disclosed, the average deal was valued at $74.6 million (83.3 million euros), compared with $175.3 million in the year-earlier period.

"Most of the M&A activities we're seeing in the world of venture capital now aren't deals where one solid business decides to buy another that's a good strategic fit," says Tony Abate, general partner at Boston-based Battery Ventures. Instead, he says, it's the case of a venture capitalist running out of patience with a portfolio company that has run out of cash, even if it means exiting at a loss instead of the hefty profits that were the rule 18 months ago.

Some of the sales taking place fall into the distressed category. Christine Comaford, general partner of San Francisco-based Artemis Ventures, a venture-capital firm, says an online learning firm in which she is an investor acquired the assets of a rival company less than three months ago. The acquired company had received capital infusions of more than $16 million, she says. But her own portfolio company paid only $20,000 upfront for the assets, and further payments, linked to royalties, won't exceed a few hundred thousand dollars, she says.

Ms. Comaford has been busy fielding calls from founders and managers at struggling companies, asking if one of Artemis's portfolio companies might be a buyer.