Has the frothiness returned? Maybe…

I’m feeling something.  Since exiting the traditional VC world, I’ve spent most of my free time working with early stage start-ups.  When I say start-up, I mean real start-ups… like founder, maybe one other person, a little bit of money, that kind of start-up.  As an aside, I gotta tell you, the entrepreneurs building businesses in this kind of environment have the courage (or crazy) gene in great and peculiar abundance.

So back to that feeling… on more than one occasion, and involving more than one company (and in talking with more than one VC), conversations between acquirers andacquirees seem to be picking up.  Yes, I know, this is a small sample size, but having sat on both sides of the table (as a Corp Dev exec and an entrepreneur), I would say these conversations are the classic precursors to something bigger.  Large acquiring companies are sensing that 2010 could be a year of great activity, a year of great opportunity.  Now, they posit, is the time to get good deals before those good deals command higher prices in a frothier market.  This pattern tends to precede a time of greater activity.  If my hunch is right (who knows?), here’s how I think this could go down over the next year or two:

• It starts with small acquisitions of pure technology or tuck-in plays.  Now is the right time to have a tight technology story even if a user base around that technology has yet to develop
• Because of the winnowing of so many new start-ups over the past 12-18 months, the crop of eligible companies ready to invest in building a real user base has been limited - the economic downturn has acted like an antibiotic, killing off most anything with which it comes into contact.  But alas, those stronger companies that have survived could be poised to break out in 2010.  Quickly built momentum could translate into higher buy-out value.
• Growth in 2010 will become even more important as we begin to see the increasing affects of inflation.  To stay ahead of the game, growth through acquisition will become even more important.  Those companies which have broken through, found a growth trajectory and sustained some level of scale could see larger buy-out values as large companies try to meet and exceed Wall Street expectations.

Sure, this is conjecture based on anecdotal evidence, but the pattern feels familiar.  Here comes the cold water - all of this activity will be dampened by a still dormant IPO market.  Acquirers will still have the upper hand -acquirees still don’t have the credible threat of an IPO as an alternative to selling their business.  One more thing - there will not be a bell shaped distribution of deals - it will be skewed greatly to the left.  Lots of small deals.  That could be a good thing for small companies with solid technology and good teams.  It could also be a good thing for those investors willing to make several small bets in early stage companies.  For a while, I think, angel and venture capital will be a small in, small out game.  For those able and ready to play that game - 2010 could be a great year.

Stay tuned…

Tagged as: Acquisitions, Angel Investing, Corporate growth, inflation, Start-ups, Venture Capital