VC Investment Holding Steady

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It's not the go-go nineties, but venture capital investment is showing some sign of recovery according to the Ernst & Young/VentureOne U.S. Venture Capital Survey (As of this writing, the press release was not publicly available on the VentureOne site). Though transactions decreased slightly, from 464 in 2Q'03 to 443 in 3Q, more money was poured into healthcare and products & services, sustaining the overall dollar amount invested in companies.

A continuing sign of recovery, as noted by the survey, were positive indicators related to liquidity, including an increase in completed IPOs and IPO registrations. Six venture firms completed IPOs this quarter, raising $429 million, while 19 firms registered for IPOs. M&A transactions also remained steady as 74 start-ups were acquired.

As Mark Sinclair, Ernst & Young's Southwest Area Venture Capital Advisory Group Leader noted, "The increased number of IPOs coupled with higher value M&A activity could be the start of a clearer path to successful exits, resulting in an increased willingness to provide capital to early stage companies."

So is now the time to search for venture capital? VC financing is not for the faint of heart. Entrepreneurs need to be prepared to give up significant ownership, in some cases 40% to 60% of the company if they go with a larger VC firm ($1 billion under management), as an Oct. 22 press release from VentureOne, What Kind of Deals are Start-ups Getting from VC's" noted. Going with a smaller firm, you're less likely to give up as much, but beware, smaller firms require stiff protective provisions, such as liquidation preferences.

As Russ Garland, the report's editor put it, "Entrepreneurs and VCs alike need to be aware that venture money -- especially in this environment -- comes with a price."