It’s obvious that the financial downturn has negatively impacted innovation. Lack of investment has meant fewer startups, and lack of capital for liquidity events and exits has pushed a listless market into even greater torpor. Overall, the downward pressure is preventing a lot of great new ideas and technological advances from getting off the ground.

But is there a positive side effect of the recession? What if the legacy of the most acute economic distress since the 1930s is that, rather than simply returning to our old pace and methods, we shift to a studied, more sustainable form of innovation and growth? What if we’re entering an era of “refined” innovation that will change the way ideas move from concept to market for years to come?

Stop adopting, start assessing

We’re coming off a ten-year run of hyper-innovation that has revolutionized our daily lives. From consumer electronics to energy efficiency to alternative materials to data interchange to entertainment, virtually every aspect of our lives has been impacted. The past decade has essentially been a large global whiteboard on which visionaries have jotted down earth-shattering new concepts that ultimately formed and transformed big and bold markets.

But the new truth is that we can absorb only so much innovation—and so much change—in a given period. That’s why, at some point, consumers, commercial markets, investors, and strategic partners need to stop adopting and start assessing and refining.

This means we’ll begin to embrace new technology on a more selective basis. It means we’ll begin to incorporate and absorb the long-term impact of innovation and transform past fads or previous follies into sustainable evolutions. And it means we’ll begin to look for synergies across various breakthrough ideas that have survived the vetting process and extract their most positive and efficient attributes.

Call it innovation refinement or innovation consolidation, this is where we need to go. It’s about catching our breath and extracting maximum value from the super-spasm of innovation that has just taken place.

Low-risk funding

What does this mean for financing? Everything.

There are vast opportunities for low-risk innovation investment today. And the foundation has already been laid for this approach. A vast array of science projects has been hatched and funded, and now we need to focus on which of these innovations can be improved on with additional … Next Page »

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The second half of 2009 provided a good measure of optimism, easing some of the pain investors felt toward the end of 2008 and in early 2009. The stock market has been volatile but up significantly overall. There are signs of increased lending activity. Mergers and acquisitions have picked up. And there’s a pulse in the IPO market.

Yet despite indications of recovery, we shouldn’t be lulled into thinking we’re over the crisis. The labor, housing, and consumer markets are still struggling. And there’s still plenty of fear and uncertainty as we emerge from the longest downturn since the Great Depression.

Keeping that cautionary note in mind, what do the recent positive strands of hope in the IPO, M&A, and credit markets tell us?

To begin with, a potential increase in IPO listings isn’t necessarily a signal that capital markets have returned to normal. Why? Because the companies coming to market are the best of the best, the ones who have survived the past 24 months of havoc and have continued to build on sound business fundamentals.

And that’s the point—we’re not out of the woods yet; every company that wants to go public isn’t going to succeed. After the initial IPO backlog is worked down, the next wave of public offerings, if any, will continue to present a challenge and will come from specific sectors that investors see as the leaders in potentially expanding markets—for example, health care services and technology, financial services, and software and software services. Other, more traditional companies that can provide a compelling investor advantage and return will also be in the IPO mix.

Job growth in the health services and education sectors and annualized spending growth in the equipment and software sectors—ranging from 10 percent to more than 30 percent from Q3 2008 to Q1 2009, and evidenced by recent quarterly earnings growth by industry leaders—give some hint of recovery as well as an indicator of where the money may flow in the near future. Still, even though many institutional money managers need to invest and are waiting for the right opportunities—including IPOs—don’t expect to see a boom.

In fact, it may end up that growth will be fueled more by the credit markets than … Next Page »

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Fund-raising by private equity firms slowed dramatically during the last three months of 2008, so much so, in fact, that an analysis shows an 18 percent overall decline among fund-raising by U.S. firms compared to 2007—all of it due to the Q4 meltdown.

An analysis published today in the Dow Jones Private Equity Analyst newsletter found that 99 funds raised about $43 billion during the fourth quarter, a roughly 57 percent decline from the nearly $100 billion raised by 208 funds during the same period in 2007.

Fund-raising by private equity firms in 2008 had been running at a pace slightly ahead of the industry record set in 2007 until the fourth quarter—when fund-raising by private equity firms slowed to a virtual standstill. Based on statistics from the LP Source database, the analysis found that 363 U.S.-based private equity funds raised $265.6 billion in 2008—18 percent below the $325.8 billion raised by 506 funds in 2007. The analysis focused on private capital invested with venture capital firms, buyout and corporate finance funds, mezzanine funds, and secondary funds, also known as funds of funds. No hedge funds were included.

“While 2008 was still easily the second-best year on record, the decline we saw in the most recent quarter may steepen in the coming months,” newsletter managing editor Jennifer Rossa said in a statement. The economic crisis triggered by the Lehman Brothers bankruptcy in early September hit the buyout industry particularly hard, as fund-raising declined 26 percent to $181 billion raised among 143 buyout funds—a level comparable to 2006. At the nine-month mark, the buyout sector was down just 3 percent compared to 2007.

Overall venture capital fund-raising, which was up about 4 percent at the nine-month mark, fell by 25 percent for the year in 2008, with $24.7 billion raised across 150 funds nationwide. It was the lowest fund-raising total for the venture industry since 2004.

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Cell Therapeutics is running seriously low on fuel. The Seattle-based biotech company, which has run up an accumulated deficit of $1.2 billion in its 17-year history, said late Friday in a regulatory filing it doesn’t have enough cash to operate the next 30 days, and needs to raise new capital immediately. The company had cash and investments of $15.3 million when it reported at the end of March, and current liabilities of $47.9 million.

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There are two main doors that a venture-backed company can go through to provide a payday for its early investors: go public, or get acquired. And for the time being, the first door has slammed shut. In the second quarter of 2008, which ended yesterday, there were no initial public offerings by venture-backed companies in the United States. Zero.

It’s the first time since 1978 that U.S. IPO activity has come to a complete halt, according to the National Venture Capital Association (NVCA). The first quarter wasn’t much better, with only five IPOs by venture-backed companies. In 2007, by contrast, there were 86 (18 in Q1, 25 in Q2, 12 in Q3, and 31 in Q4). In a report issued today in cooperation with financial news organization Thomson Reuters, the NVCA calls the situation “concerning enough to be characterized as a capital markets crisis for the start-up community.”

Nobody thinks the IPO market is dead—but it may be in for at least several more quarters of suspended animation. “It’s not Chicken Little,” says Michael Greeley, a general partner at Flybridge Capital Partners and president of the New England Venture Capital Association. “You just have to modulate your plan.”

For companies, that could mean going out to investors for another funding round—or just making their existing capital last longer. “Clearly, if you thought your company was going to raise capital based on an IPO price, that is not going to happen for another year or two,” says Greeley. “At Flybridge we just finished our partners meeting and for us, the lesson is what can we be doing now to operate our companies in a really disciplined, capital-efficient way.”

That’s looking like a wise idea. Statistics gathered by the NVCA show that 2008 is on track to be the worst year for IPOs since 2002, right after the dot-com crash, when there were only 22 IPO exits for venture-backed companies. And the bad year is part of a relatively disappointing decade, at least compared to the early 1990s: Between 2001 and 2007 there were only 385 IPOs among venture-backed companies, compared to 1,353 for the period 1991-1997. As a corollary, there’s a longer wait for the companies that do go public: the median age of venture-backed companies at IPO was 8.6 years in 2007, compared to just over 6 years in 1997.

M&A and IPO Activity Among Venture-Backed Companies, by Year

Source: National Venture Capital Association

In a survey last week, the NVCA asked its own members to name the three biggest reasons for the current IPO drought. Of the 662 venture partners who responded, 77 percent named “skittish investors” as a reason, while 64 percent pointed to the credit crunch resulting from the subprime-mortgage debacle, and 57 percent blamed the high cost of complying with Sarbanes-Oxley accounting rules for companies preparing to go public. A few other interesting reasons came up as well: lack of analyst coverage of smaller companies (18 percent), a generally poor selection of IPO candidates recently (15 percent), and the disappearance of investment banks willing to invest in early-stage companies (14 percent).

There was little optimism among NVCA members that the crisis will lift soon. Asked when they thought the IPO window would re-open, only 20 percent thought it would be this year. The largest group—43 percent—predicted that IPOs will pick up again around the summer of 2009, while 32 percent thought it might take until mid-2010, and 5 percent thought it would take even longer.

But while IPOs have dried up, the number of companies “in registration” with the Securities and Exchange Commission—that is, companies that have filed the paperwork to pursue IPOs—is about the same right now as it has been for the last five years:

Number of IPOs Per Year and Companies in Registration on the Last Day of Each Year

Source: National Venture Capital Association

I asked Heesen whether it was possible that the current dearth of IPOs would be offset later this year, if some of the 42 venture-backed companies currently in registration decide to stop circling the airport and come in for a landing.

He didn’t think so. “A very large number of companies, about 20 recently, have de-registered, saying they are no longer going to go the public route, and they’ve either been acquired or they’ve tried to secure additional financing,” Heesen noted. “And we also see quite a few companies registering just so that they can show the public at large and large corporations that they are Sarbanes-Oxley compliant and therefore ‘clean’ and ready to be acquired. It’s a for-sale sign, unfortunately, rather than a sign of interest in actually going public.”

There’s disagreement within the VC community over what all of this means for entrepreneurs and innovators. Greeley says that funds have raised a lot of capital that they’re itching to disburse, and predicts that … Next Page »

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Advent International, a buyout firm with headquarters in London and Boston, said yesterday it has completed fundraising for a $10.4 billion fund that it intends to use for international buyouts, strategic restructuring opportunities and growth buyouts in the financial services, retail, consumer, leisure, healthcare, technology, media, telecoms, and industrial sectors. The fund, Advent’s sixth, is its largest to date and is the ninth-largest buyout fund ever raised, according to the company. The company has raised $23 billion in private equity capital since its founding in 1984.

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