Naming That Tune

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Coping with Catastrophe
The disaster in the Gulf Coast is a gut-check for VCs -- and other alarm:clock news from the land of private venture funding.

Last week was a somber one, as the situation in the storm-ravaged Gulf Coast went from bad, to worse, to apocalyptic. The markets did seem to hold their own despite the immediate worries over the oil supply. But there were some heightened concerns in private venture funding.

Venture capital businesses had actually been making steady progress since the dot-com bust, and investors have been hoping for some big pay-outs via IPOs. But cataclysmic events like those surrounding Hurricane Katrina inevitably dampen investor enthusiasm. That situation means VCs will probably continue waiting, and possibly dumping more cash into their portfolio companies.

While the tech IPO market is cool, and will probably remain so, given market jitters, M&A is still a viable option for startups. The recent rumors that News Corp. offered $3 billion for Skype sent a buzz through the market. But ask any VC and they'll tell you that the real prize -- the easy money --  is in an IPO.

And what about the levels of VC investment? The most recent available numbers indicate a slowdown. According to figures from Dow Jones VentureOne and Ernst & Young, there were 474 VC deals in the first quarter of 2005 -- the lowest number in more than three years. The total amount of money invested in startups in first-quarter 2005 also fell to $4.6 billion, the lowest amount since second-quarter 2003.

We don't think all the news is bad, though. On the IPO front, the Internet telephone startup Vonage announced it was hoping to raise $600 million through a public offering. The news was met with mixed reviews -- many observers find Vonage's expense-to-revenue ratio unacceptably high. But sometimes markets thrive on controversial offerings.

We were also surprised to see that Science Applications International Corp (SAIC), a privately held research and engineering company, founded in 1969, plans to go public, with an initial offering worth up to $1.73 billion. SAIC has 42,000 employees and revenues of $7.2 billion in fiscal 2005. Those are impressive numbers, and we don't think SAIC would be going public, after 35 years as a private company, unless it was confident it could convince the public markets to pony up. SAIC says that after the IPO, insiders will still own 80-90 percent of the company, and that its rationale for the IPO is to use the markets to compensate employees stock option programs.