As 2005 comes to a close, a few 2006 predictions are on my mind…
1) The year of creative exits.
With the advent of Sarbanes-Oxley, the IPO bar is still too high for most VC-backed start-ups. If the company doesn’t have more than $100m revenue, four quarters of profitability and 8-10 years of operational maturity and history, it’s an unlikely candidate. Besides, value-maximizing CEOs and VCs are not keen to pursue a financing event that’s not really an exit, given strict lock-up and public disclosure issues. Thus, M&A has been the VC-backed exit path of choice. Yet many companies are not necessarily appealing for M&A targets. Therefore, 2006 will see more creative exit scenarios. Will VCs take a page from their private equity cousins and begin to use leverage to recapitalize companies and achieve their return? Will we see more aggressive redemption terms and board skirmishes to return excess cash? Will we see private equity firms and hedge funds come into VC-backed companies that have gained some revenue traction to buy out the early-stage VCs? Already, signs are emerging that these creative exits will be attempted by the impatient VCs sitting on 6-8 year old portfolio companies from the bubble days. More will follow.
2) Traditional media, newspapers and magazines aren’t dead…yet.
Many have been predicting the demise of traditional publishing since the start of the Internet. The rise of Google has caused these calls to rise in volume. And yet, many of these companies just keep on ticking – and some are innovating into the online world through aggressive acquisitions (e.g., NY Times and About.com) and business transformations (e.g., IDG’s transformation from a mainly traditional print businesses only to a media conglomerate of online, research and investments). But despite rumors of their demise, many of these traditional media properties will retain great value – as subscribers, brands and advertisers all prove to be stickier than most think. After all, scientists believe it took decades, not years, for the dinosaurs to disappear from Earth.
3) Capital gap continues.
VCs continue to raise big funds, private equity firms continue to raise even bigger funds, and start-ups continue to fret about minimizing dilution. Thus, there remains a "capital gap" for the early, early-stage entrepreneur that only wants $1-4 million, but can’t find a strong market for that small a "nibble" in the private equity world. As a result, many entrepreneurs will push harder to hold their breath and self-fund in the earliest stages. And smaller VCs (some old, some new) will continue to flourish in focusing on this higher risk, higher upside class of opportunities.
4) Blogging continues. Even from VCs.