A boom of global venture-backed company exits that took off during 2005 has set the stage for a new trend on the back of increased merger and acquisition valuations in Israel and the US and a rise in initial public offerings in Europe.
According to Transition, the fourth annual Ernst & Young Venture Capital Insight Report, this growth trend in value and number of venture-backed exits is expected to continue this year and into 2007.
"Market demand continues for great companies, including venture-backed companies, both in terms of initial public offerings and acquisitions," said Gil Forer, Global Director of Ernst & Young's Venture Capital Advisory Group.
Global venture capital investments reached a volume of $31.3 billion in 2005, of which 93 percent of capital invested was represented by the US, Canada, Europe and Israel. China and India accounted for the remainder. Venture capital firms in the US raised $41b. in new funds over the past two years. European firms closed on â‚¬3.7b. in 2005, more than double compared the year before.
A significant growing trend, the annual report on the state of the venture capital industry found, is the increase in buy-outs of venture-backed companies by private equity firms, thus providing an "exit" to venture capital investors.
"The number of exit options available to venture-backed companies - whether the exchange or the funding vehicle - is increasing, making it more important than ever to allow a company's business imperatives to determine the choice of exit," Forer said.
There is a potential exit backlog of 1,912 private venture-backed companies in the US, Europe and Israel according to Ernst & Young estimates.
"These companies, with a cumulative $51b. of venture capital invested in them, have not received financing in several years and are maturing from a venture capital perspective," Ernst & Young said, noting that current rates of venture-backed exits call into question the possibility of this many companies finding a timely and successful liquidity event. called into question the possibility of this many companies finding a timely and successful liquidity event.
In addition, the report showed continued contraction in the pool of private venture-backed companies in the US, Europe and Israel, rebalancing the venture capital portfolios. The contraction is present mainly in the fields of information services, communications, consumer and business services and retailers, as a result of promising new opportunities in biopharmaceuticals, medical devices, semiconductors, electronics and Web 2.0.
Sector by sector analysis showed that biopharmaceutical and software companies continued to dominate venture capital investing in the US, Europe and Israel.