VCs Assess Fallout From Lehman Brothers Loss
By Brian Gormley and Tomio Geron | VentureWire
The potential demise of Lehman Brothers Holdings Inc. could take a big sponsorof initial public offerings out of play at a time when venture capitalists arestruggling to take their companies public.
Lehman Brothers, which has filed for Chapter 11 bankruptcy, is looking to shopportions of itself, including its investment-banking business. Several venturebackedcompanies in registration to go public list Lehman as part of theirinvestment-banking syndicate, including Eyeblaster Inc., a provider of onlineadvertising technology, and LogMeIn Inc., which sells remote connectivityproducts.
Lehman is also the fifth-largest U.S. mergers and acquisitions advisor, accordingto Dealogic. It ranks right behind Merrill Lynch & Co., which agreed to be sold toBank of America Corp. Lehman is also in advanced discussions to sell itsinvestment-management division, which includes venture capital arm LehmanBrother Venture Partners, the firm said Monday.
This year, only seven venture-backed companies have gone public, well off fromthe pace in 2007, when 69 such companies staged IPOs. The loss of a significantunderwriter won't help matters.
"When you're down to an oligarchy, it makes it harder to be able to get the bestout of companies," said Mark Heesen, president of the National Venture CapitalAssociation. "You hope that the remaining investment banks continue to be asaggressive on behalf of venture-backed IPOs."
Lehman's bankruptcy has forced Peter Barris, managing general partner of NewEnterprise Associates, to rethink plans to take public at least one company, EchoGlobal Logistics Inc., a Chicago seller of technology used for transportation andlogistics needs. The company, which filed for an IPO in April, listed Lehman asone of the firms that was to usher it to the public markets.
"With Lehman on the cover, now there's a question of what to do now," Barrissaid. "You've got to deal with it."
While many believe Merrill's underwriting unit will continue in some form atBank of America, the fate of Lehman's underwriting group is unclear."Lehman is probably more of a concern because while some teams should getpicked up, it does take another player out of the marketplace," said Javier Rojas,managing director of Kennet Partners.
The loss of Lehman's analyst team could be a blow if it is not bought out, Rojassaid. For companies seeking an underwriter, analyst teams are important togetting information to investors.
"You want to work with an underwriter who has a strong analyst team thatunderstands your company and can communicate your story well to the Street,"Rojas said. "Those teams are expensive to field. It takes big banks...to field thoseteams."
As bad as the Lehman news is, however, it's not a disaster, some ventureinvestors said. Good companies can find other investment banks to take thempublic. In the life sciences industry, for example, plenty of investment bankersare calling venture capitalists about potential deals, said Alan Frazier, managingpartner of Frazier Healthcare Ventures.
"I think there's definitely room for a somewhat smaller Wall Street," Frazier said."The great bankers and analysts at Lehman Brothers will be well placedsomewhere else, for sure."
Of greater concern than the potential loss of an underwriter is the volatility thatcompanies face when trying to go public, said Jim Shapiro, general partner ofKearny Venture Partners. "It's the bear market, it's the broad financial problemsthat the market's experiencing" that are curtailing IPOs, Shapiro said. "The lastcouple of days accentuate that."
Even if other banks pick up Lehman's business today, the turmoil raisesquestions about how many players will be around for the long term to facilitatedeals.
The needs of venture-backed companies going public are very different from thatof large financial institutions or real estate conglomerates that have been seen onthe market recently, Heesen said.
The consolidation of the banking industry in the 1990s, such as Chase ManhattanCorp.'s 1999 acquisition of Hambrecht & Quist Group, resulted in some negativeeffects, but a group of entrepreneurial bankers did emerge, and that couldhappen again. It could also create an opening for some existing boutiqueinvestment banks.
"I'd assume this consolidation will free more people who have been more on thebanking side to pursue entrepreneurial ambitions [to] create a next-generationinvestment bank focusing on emerging companies," said Rick Heitzmann,managing director at FirstMark Capital.
Even before Lehman's downfall, venture-backed IPOs were almost non-existentthis year, so the primary exit option today is a trade sale.
"No doubt, fewer investment banks being active reduces the bandwidth for companies looking for IPOs," said Bob Ackerman, managing director of AllegisCapital. "But that's not an acute problem today because of the general turmoil inthe market and lack of receptivity to IPOs."
Even so, some venture investors feel that the best companies can still get onto thepublic markets. "I think healthy companies will always get public, I just think thebar will go up significantly," said William Rosenzweig, managing director ofPhysic Ventures.
—With additional reporting by Ben Charny and Roger Cheng
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