US-based law firm DLA Piper said its survey of technology company executives showed the lack of venture capital-backed company flotations meant the industry was "permanently altered" as data showed the state of independent and corporate venturing firms in the industry.
Nearly 72% of respondents said an initial public offering (IPO) of a portfolio company was no longer the optimal exit strategy and so more than 59% of them said the traditional venture capital model had been "permanently altered" and would lead to both fewer venture capital firms and fewer funded technology companies in the future.
Peter Astiz, global co-head of DLA’s technology sector practice, said: "This is a profound, game-changing development. If there is a long-term expectation that the IPO market will not rebound, that means a reduction in the number of dramatic ‘home runs’ for venture capital investors and lower overall returns. Fewer IPOs also means fewer small- and medium-size public technology companies, which traditionally have been the acquirers for venture-backed company exits.
"Of course, tech companies will continue to invent and innovate, and investors will continue to invest, but the model is definitely changing. For start-up tech companies, the bar is being raised, capital will be harder to come by and pressure to perform will increase."
The third quarter had 14 venture-backed IPOs, marking slight declines in the number and total value of offerings in the second quarter but an increase over the same three-month period last year, according to US trade body National Venture Capital Association (NVCA) and media group Thomson Reuters. The 14 IPOs raised $1.25bn, compared to 17 receiving $1.27bn between April and June and three gaining $572m in the third quarter last year.
However, there were104 acquisitions worth $3.8bn in the latest three-month period, which was nearly treble the value of the 69 agreed last year.
Mark Heesen, president of the NVCA, said: "The sustained strength of the acquisitions market has been the quiet, untold exit story of 2010.
"While those following the industry have been focused on the IPO market recovery, venture-backed companies have been selling at record levels, generating very respectable returns for investors. We expect this momentum to continue, and perhaps even accelerate after the November elections as large corporations put cash to work by making strategic purchases."
Venture capitalists invested $4.8bn in 780 US deals in the third quarter of the year, according to the MoneyTree report provided by accountants PricewaterhouseCoopers and the NVCA, based on data from Thomson Reuters.
There was a 31% fall in the amount invested between July and September and a 19% drop in the number of venture capital (VC) deals, compared to the second quarter when $6.9bn was invested in 962 deals. In the same period last year $4.8bn was invested in 637 companies.
However, although deal activity has stagnated, fundraising has started to return from a low base. Forty-five US-based VC funds raised nearly $3bn in the third quarter, according to Thomson Reuters and the NVCA. This was a 40% increase, by dollar commitments, compared to the second quarter of 2010, which saw 51 funds raise $2.1bn, while 32 fund raised $2.3bn in the same period last year.
By comparison, there were more than nine corporate venturing funds raising $1.85bn primarily outside of the US in the third quarter, according news provider Global Corporate Venturing. This data excludes commitments made from companies’ balance sheets.
There were also 162 deals agreed globally with an aggregate $2.9bn in the rounds involving at least one corporate venturing unit. About 80% of the deals in the third quarter had US portfolio companies as the target, Global Corporate Venturing added.