Venture-backed company exits continued to lag in the third quarter of 2008, according to the Exit Poll report by Thomson Reuters and the National Venture Capital Association (NVCA). There was just one venture-backed IPO in the quarter, and the tally of M&A exits as of the last day of the quarter came to a modest 58 transactions for the period. In the first three quarters of 2008, there have been just 6 IPOs of venture-backed companies, representing the lowest volume for the first three quarters of the year since 1977.

"The crisis in the financial markets has further exacerbated an already troubling situation in that most venture-backed companies are postponing or abandoning an IPO exit for the foreseeable future," said Mark Heesen, president of the NVCA. "Additionally, the lower M&A transaction volume can be attributed to the expected uneasiness of large corporations who are exercising more caution in their acquisition strategies of venture-backed companies until market conditions become more auspicious."

Mr. Heesen went on to explain how exit market conditions will impact the venture capital industry in the foreseeable future.

"These companies that are ready to exit are very strong, with positive earnings as well as innovative technologies and business models, so they will remain in the venture capital portfolio until conditions improve," he said. "Should the current situation be prolonged into 2009, we can expect fewer new investments by the venture industry as they will need to spend their time with these later stage companies that are waiting to go public or be acquired."

IPO Activity Overview

There was just one venture-backed IPO in the third quarter of 2008, following the second quarter when there were no issues. The one issue brought to market represents the largest deal of the year. Valued at $187.5 million, the offering came from Texas-based company Rackspace Hosting, provider of website development, Web-based IT systems, and computing as a service.

In addition to the U.S. market activity, two companies that received US venture financing went public on foreign exchanges in the third quarter.

As of September 30, 2008, 1/3 of the venture-backed companies that went public during 2008 were trading above their offering price.

Thirty-eight venture-backed companies are currently filed for an initial public offering with the SEC. This level falls short of 2Q 2008 when 42 venture-backed companies were in registration. Additionally, 28 venture-backed companies have withdrawn from registration in the year-to-date period.

Mergers and Acquisitions Overview

As of the last day of the third quarter of 2008, 58 venture-backed M&A deals were reported, 24 of which had an aggregate deal value of $3.5 billion. The average disclosed deal value for the quarter was $146.4 million.

The Information Technology sector dominated the venture-backed M&A landscape, with 38 deals and a disclosed total dollar value of $1.7 billion. Within this sector, Computer Software and Services companies accounted for the bulk of the target companies, with 19 transactions across this sector subset. Non-High Technology saw the next highest level of activity with 14 deals and a combined disclosed value of $1.3 billion. Finally, Life Sciences deals accounted for six exits with disclosed values of $466.2 million.

The largest transaction of the quarter was the acquisition of energy company APT Generation by International Power PLC. The transaction, valued at $856.4 million, was completed in July.

Despite lower volumes, the quality of disclosed deals remains steady. Deals bringing in the top returns, those with disclosed values greater than four times the venture investment, accounted for 54 percent of the total compared to 50 percent last quarter. Those deals returning less than the amount invested accounted for 17 percent of the quarter's total, compared to 33 percent of the total last quarter.