Venture capital doesn’t play as big of a role in acquired companies as one might think.

We talk a lot around here about the importance of venture capital — the fuel for new business ventures. But venture capital may be a bit overrated — at least when it comes to acquisitions of privately-held tech companies.

According to a new study released today by CB Insights, a whopping 76 percent of acquired tech companies last year had not raised venture capital prior to their sale. That’s a bit surprising to me, but the authors of the report note that many businesses are growing the “old-fashioned way” — from profits or bank loans.

We’ve seen this play out here in Seattle.

Double Down Interactive, which sold last year to casino gaming giant IGT for up to $500 million, never raised venture capital funding. Another Seattle-based gaming startup, PopCap, bootstrapped its way to success before taking late-stage funding from Meritech Capital before its sale to Electronic Arts for up to $1.3 billion in July 2011.

Washington state ranked 6th at 50 deals.

The CB Insights report found that 2,277 tech companies were acquired last year, with expectations that the market could heat up even more in 2013 due to the enormous cash piles of big technology juggernauts like Google, Microsoft and Amazon.com.

In fact, Google and Facebook were the top two acquirers of private tech companies in 2012 — acquiring 12 companies each. They were followed by Cisco, Groupon, Twitter, Oracle, Avnet, IBM, EMC and Microsoft. Most of the acquisitions in 2012, over 80 percent in fact, were under $200 million in value.

California is king of the castle when it comes to tech acquisitions, with 455 deals. That was more than the next five states — New York, Texas, Massachusetts, Illinois and Washington — combined.

I’ll be discussing some of the trends in tech M&A at the The World Financial Symposium’s Growth and Exit Strategies for Software and IT Companies conference on Wednesday morning. I hope to report on the discussion, so check back on GeekWire for more reports.

Money photo on home page via Philip Taylor

Comments

  • andrew

    Playing devils advocate – there are a few reasons why these acquire companies did not have VC funding beforehand – the two which immediately come to mind:

    1) Google / Facebook are cash rich and acquire companies very early for their specific technologies, before they’re barely even companies, i.e at an earlier stage than a traditional VC would potentially get involved

    2) Others may have been acquired prior to VC funding because they couldn’t get VC funding, got desperate for cash and sold at a bargain price

    These are just two immediately obvious rationales – with another two minutes I could

    • johnhcook

      That’s probably some of it for sure, but the % still seems pretty low to me in terms of number of VC-backed companies that were acquired in 2012.

  • http://blog.CascadeSoft.net @CascadeRam

    John, these metrics seem to assume that every acquisition is a success.

    Did all of these acquisitions (for the 24% VC-funded companies and
    remaining 76% companies) result in the VCs and founders getting
    significant financial returns on their investment (money or time) ?

    If not, do you know what percentage of these acquisitions were firesale-exits or acqu-hires ?

    • johnhcook

      The report doesn’t go into that sort of detail, and not sure if that info is available. But that’s a good point — a number of these deals could be asset purchases of defunct companies. The report did find, at least for those deals where values were disclosed, that 50 percent of deals were under $50M.

  • http://wac6.com/ William Carleton

    John, the number of angel-backed companies dwarfs those backed by VC funds. Surely there are many angel-backed companies in that 76%?

    • johnhcook

      Yeah, and perhaps what they mean, but not sure whether angel is included in that total. I’ll follow up and ask. Here’s how the report states it.

      “In a big surprise, 76% of tech companies acquired in 2012 had not raised investment prior to acquisition. While there were no bootstrapped billion dollar exits, it is clear that there are a lot of tech companies being formed who are able to grow the old-fashioned way – out of profits or using traditional financing sources like banks.”

      • http://twitter.com/Seattle_Startup Seattle Startup

        The answer to William’s question will be enlightening, Thank you for tracking it down.

        • johnhcook

          I asked CB Insights, and the 24 percent is just VC and “institutional” money. So, that means there are plenty of angel deals in the 76 percent — meaning not everyone is bootstrapped, banked financed, etc. Here’s what CB Insights told me:

          “76% hadn’t received institutional investment so this doesn’t include angel investment. I’d suspect many took … some type of angel financing or at least “friends & family” money.

          • http://twitter.com/Seattle_Startup Seattle Startup

            Thanks…that is encouraging. Also, it would be good for CB to include the actual angel data in their report –“not raised investment” is misleading, at best.

  • tom simpson

    John, I was struck by the 76% when I saw it yesterday. The press often celebrates announcements from emerging companies that raise VC. Yet, I have often believed it is significantly more impressive when a new business figures out how to be successful with raising institutional funding. Typically, these are companies that creatively figured out how to gain early traction with customers, tenaciously keep costs low and are disciplined about managing cash flow. Congrats to the 76% that made it on there own.

  • Guest

    Not surprising actually. VC’s rarely invest in the early stage and wait for startups to get traction. If a startup does get traction they are usually doing well enough to find cheaper alternatives like banks, angels or self fund- unless they want to gamble ‘going big’ with the easy VC money.

  • http://fearmyblog.com/ tacanderson

    It would be really interesting to look at this data if you could separate out the talent acquisition “aqui-hires” from legitimate acquisitions.

    • http://twitter.com/fijiaaron Aaron Evans

      A top “aqui-hire” isn’t more than a million per hire. Most so called talent aquisitions that are above that range are really just competition killers. Otherwise you’re just hiring someone to quit because they have the money to retire on or fund another startup.

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