The Acquisition Option

With venture funding down and the market for IPOs still anemic — just eight venture-backed companies so far this year, compared to an annual average of 64 from 2003-2007 — emerging companies hoping for an exit are increasingly on the lookout for suitors.  Several trends indicate a potential upswing in M&A activity early in 2010.

First, as Montgomery & Co points out (slide 4), there is a growing traffic jam of venture-backed firms who will be looking for an exit.  At the end of 2008, there were about 800 companies with venture investment dating at least 10 years.  Due to significant increases in venture investments starting in 1999, this number will double by the end of 2010.  Secondly, as a WSJ article noted, more companies are holding cash than at any time in the last 40 years, with the 54 largest IT firms holding a combined $280 billion in cash (Google leads the pack with $22 billion in hand at the end of Q3).

With an excess of companies looking to be acquired and numerous suitors with pockets stuffed full of cash, how do you mix the ingredients to bake a premium valuation at exit? At least one Venture firm shares advice on how to entice potential acquirers. Chief among this strategy is something very simple: prioritize business development partners who could be strategic buyers.  And remember to keep a little something under the kimono.