WHEELING & DEALING
A Better Start To The New Millennium

By Jean-Marc Levy

First published in HRO Today (March 2005)
 

2005 is shaping up to be a very good year for private equity and venture capital.
 

After a dismal start to the new millennium for investors and capital seekers alike in the private capital industry, three factors should contribute to a strong year for venture capitalists and entrepreneurs seeking investments, particularly in the Human Capital sector.

The continuation of the economic recovery is good news for the Human Capital space. Economic recovery in this sector typically lags general economic recovery, but with a solid 2005 economy expected on the heels of a strong 2004, the timing is right.

Additionally, after a strong up-tick in 2004 for private and public exit opportunities involving venture-backed companies, 2005 is shaping up to be a solid year too. According to a Dow Jones VentureOne report, in 2004, venture-backed IPOs reached their highest levels since the heady dot-com days, and IPO volume was on par with 1998 levels. The current pipeline of venture-backed companies in registration indicates that 2005 should also prove to be a very healthy year. On the private exit side, M&A transactions involving venture-backed entities also continued to show strength in 2004 with the highest aggregate transaction volume since 2000.

Finally, the private investment overhang (the amount of money already raised through 2000 and sitting in private equity and VC coffers, waiting to be invested) while still sizable is nowhere near the $80 billion to $150 billion it had been estimated to be at its peak in 2001-2002. In fact, fund-raising in the second half of 2004 showed some notable strength for the first time in years, indicating the emergence of a new generation of funds and investors who believe that there are enough attractive investment opportunities for their money to go to work over the next several years.

These three factors began to converge last year, when according to The MoneyTree™ Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, for the first time since 2000, venture capitalist investment showed some growth from the prior year. Early stage investing deals also grew, and in fact represented a slightly higher percentage of all venture capital activity in 2004 than in prior years.

A sampler of early 2005 transactions in the Human Capital space is indicative of the continuation of a favorable investment climate going into 2005. They range from fairly small Alabama-based Daily Access Corporation (a provider of tech-based services and products to retirement plan sponsors who was able to secure $2.5 million in capital) to later-stage Rewards Plus (a provider of outsourced benefits administration and technology who raised about $11 million from a group of investors led by Questmark Parners), without forgetting downright dot-commish Jobster whose hybrid online social networking and recruiting system attracted $8 million in investment from Ignition Partners and Trinity Ventures before even being launched commercially. These transactions illustrate the willingness of private equity investor and VCs to invest in a broad range of Human Capital companies more than at any time in the past three or four years.

One word of caution though: in spite of all the improvements in the VC and private equity markets, there is still a great deal of competition out there for private equity and venture capital seekers. The days of large checks being written to fund the fleshing out of ideas sketched out on the back of napkins are not quite back (yet).

Still, based on the way the stars are lining up for 2005, the year should still be one of the best so far in this millennium for private equity and venture capital investors.