VC money floods back to tech

Venture Capitalists say there are more tech firms looking for investment, and more money around to invest, than at any time since 2000. But it won't be IPOs that provide the exit strategy this time around

The first two months of 2004 have brought with them more tech companies looking for venture capital, and more venture capitalists looking to invest, than any time since the dot-com bubble burst in 2000, according to anecdotal evidence from venture capitalists.

"The market is blistering hot," said Bruce Huber, managing director at mergers and acquisitions (M&A) advisor Broadview, speaking at the UK Technology Partnering and Investment Forum in London on Tuesday: "I can't recall when we have been so busy. We are seeing an enormous amount of activity." Ulrich Kenny, partner of corporate finance house Ion Equity, agreed with Huber's temperature-taking, but said investors' old exit strategy of the IPO -- which allowed many people to make money on hot stocks in the late 90s -- is not longer as viable as it was. "The IPO window is still pretty fragile and not really open for many tech companies," he said.

The consensus of opinion at the conference was that mergers and acquisitions are much more likely to be used as exit strategies by investors, indicating consolidation among small and innovative IT vendors. According to Peter Rowell of technology investment bank Regent Associates, there were only 20 tech IPOs in 2003, compared to 1,400 M&As.

"One of the drivers -- particularly in hardware -- is a significant lack of R&D over the past couple of years, which leaves very little in pipeline to come to market," said Kenny of Ion Equity. "Those companies are forced to buy technology to fill the gaps."

David Fewer, an associate director of Ion Equity, said he has seen the market pick up since December. "Over the past couple of years a lot of companies were simply surviving, with VC money being pumped in just to keep them going," said Fewer. "Now we are seeing a significant pick-up in companies going out to raise new funds, and it is not survival money in the £1m to £2m range, it is of the order of £10m and it is being used to capture market share in growing markets."

Fewer's experience is echoed in recent funding announcements. Last month Open-source middleware vendor JBoss said its successful attempt to raise $10m, which coincided with a company restructure designed to allow it to go public, was oversubscribed. Also last month, US software company Tarantella said it had secured $16.4m in funding. In this case, the investors, who were institutions rather than venture capitalists, were looking for a raised share price from the company, which is already public, said chief executive Frank Wilde.

Fewer said he was surprised to hear of opportunities being oversubscribed but conceded that in terms of good companies, "it is getting competitive". Fewer, who cited figures showing that 48 percent of venture capitalists are currently raising funds, said: "For them to raise more funds, they need exit strategies, so there is also more mergers and acquisitions activity." But, he said, experiences like that of JBoss, which took only two months to raise the money, are still very rare. "The process to raise funds is still six months from starting the process to putting the money in the bank," he said.

Even if the increased level of activity is only temporary, it will come as welcome relief to many early stage tech companies. According to research published by VentureOne and Ernst & Young, investment in venture-backed companies fell from a high of $5bn in Europe (and nearly $30bn in the US) for the third quarter of 2000, to less than $1bn for the same quarter three years later in Europe (and $4bn in the US).

The UK Technology Partnering and Investment Forum is run by the European Technology Forum, a division of CNET Networks UK, which also publishes ZDNet UK.