Venture backing attracts interest

The market for buying venture-backed companies appears to be heating up, with the average disclosed value of such acquisitions vaulting 46 percent to a four-year high of $136.7 million in the second quarter, from $93.6 million in the first quarter, industry figures show.

While the number of second-quarter merger deals dropped slightly to 75 from 79 in the previous quarter, the 32 companies that disclosed their purchase price were sold for a total of nearly $4.4 billion, according to the research firm Thomson Venture Economics and the National Venture Capital Association. The 45 companies disclosing their purchase price in the first quarter were sold for a total of $4.2 billion.

Financial terms are not always disclosed when private companies are acquired, so disclosed valuations paint an incomplete picture of the merger environment. Most deals with undisclosed prices are thought to have valuations below the average of the disclosed deals. Still, industry leaders were encouraged by the new data showing the number of mergers holding relatively level and the size of the disclosed deals climbing since the end of the dot-com era early in 2001.

''Venture-backed companies are being taken seriously in the acquisition market," said Emily L. Mendell, public affairs director for the venture capital trade group. ''Corporations look to these companies as a way to acquire innovation rather than build it themselves."

At the same time, noting there are many deals where venture firms don't recoup their investments, Mendell said ''the real question is about the valuations that aren't disclosed and what they're not telling us."

A robust merger and acquisition market is especially critical to venture capital firms, which supply the financial fuel for start-up companies, at a time when the market for initial public offerings is sluggish.

Ted Mocarski, managing director for Key Venture Partners in Waltham, attributed the rising valuations to a scramble for the right kind of intellectual property, often in growing technology or life sciences niches, by established companies that buy venture-backed start-ups.

''You still have a case of the haves and the have-nots," Mocarski suggested. ''The have-nots may have some intellectual property, but it's not valuable to the buyers. The companies that have some intellectual property that's in the right niches are getting very good valuations, even if they haven't had much traction on the sales side."

Of the 154 acquisitions of venture-backed companies nationally in the first half of 2005, there were 29 in New England. Only 16 of the New England deals had disclosed purchase prices; those deals totaled $1.26 billion, and fetched an average price of $79.2 million -- well below the national average. The region's largest deals in the first six months involved Imagitas Inc. of Waltham and TransForm Pharmaceuticals Inc. of Lexington, both of which sold for $230 million.

Nationally, about one-third of disclosed deals in the first half of this year returned more than four times the investment of venture capital firms and their limited partners, the new data show. Another third either recouped the investment or returned up to four times invested capital. In the last third, companies sold for less than the total venture investment.

Such a mixed outcome is the norm in venture capital, where firms raise giant investment funds from limited partners -- pension funds, insurance companies, university endowments, and wealthy individuals -- and invest money from a single fund in multiple start-ups. Successful investments offset those that flop. ''It only takes one or two really good deals to make a fund," Mendell said.

Robert Weisman can be reached at weisman@globe.com.