It’s been a rough year for companies trying to go public in the United States. The number of IPOs during the first nine months of 2005 is down 40 percent and the amount raised in those offerings is down 59 percent from the same period last year.

Some say market conditions deserve the blame, not this year’s crop of companies. “Until the regulatory and market hurdles of going public are lowered, we expect to see lackluster IPO activity,” says Mark Heesen, the president of the U.S.’ National Venture Capital Association.

But foreign companies don’t seem to have any problem complying with Sarbanes-Oxley. Just look at the three Chinese companies that topped the tech IPOs of the third quarter. Baidu, Focus Media, and China Medical Technologies all received a warm welcome on the Nasdaq; each closed the third quarter up more than 45 percent from its offering price.

Still, things seem to be perking up. Sixteen U.S. companies took to the markets during the third quarter and raised 50 percent more than the 13 companies that went public during the first half of 2005.

Of course, an IPO isn’t the only way to go. Big companies have been bullish on buyouts. “The third quarter is looking incredible,” says Eric Gebaide, the managing director of investment bank Innovation Advisors. “Smaller companies are getting bought at larger premiums.” The median paid for venture-backed companies increased 148 percent to $59.5 million in the third quarter, up from $24 million during the same period last year. But the total dollar amount paid for startups, not including eBay’s purchase of Skype, fell 3 percent from 2004 levels. Still, experts are optimistic: “The year is likely to end as the best year for M&As since 2000,” says VentureOne’s John Gabbert.

“The third quarter is looking incredible,” says Eric Gebaide, the managing director of investment bank Innovation Advisors. “Smaller companies are getting bought at larger premiums.”

The China Puzzle

The pressure to jump on the Beijing bandwagon has some firms trying to help their portfolio companies develop partnerships and market opportunities in China. Others are teaming up with Chinese investors to help identify and develop the most promising opportunities. Still others are eyeing direct investments in early-stage technology companies, hoping to find the next Baidu.com

The Mayfield Fund, based in Menlo Park, California, is taking a page from each of those playbooks. Last month the tech-focused firm announced its first investments made in partnership with GSR Ventures, a Beijing-based venture capital firm. Mayfield infused cash into Heiyou, a Beijing-based online matchmaking company; SMIT, a Shenzen-based designer of semiconductors used in modules for digital televisions; and Mobert, a company with operations in Silicon Valley and Shanghai that makes semiconductors for mobile applications. The size of the investments was not disclosed. Meanwhile, Mayfield plans to make further direct investments in China from a newly raised $375-million technology fund.

VC Dives into Digital

Put together a former film executive, a television producer, a new media strategist at one of the nation’s largest video rental companies, and a venture capitalist who dabbles in TV and film production, and what do you get? A new venture capital firm focused on digital media.

Recently formed Spark Capital, based in Cambridge, Massachusetts, said this month it launched a $260-million fund targeted at the confluence of entertainment, the Internet, and new technology. Investor enthusiasm suggests the time could be ripe for businesses in that market: The endowments and pension funds that expressed interest in the fund offered up a total of $800 million in funding commitments—quadruple the amount the firm originally planned to raise, says Todd Dagres, one of Spark’s co-founders. The firm is already working with Comcast, TimeWarner, Sony, and Lions Gate Entertainment.

German VC Steps Up

While hundreds of life sciences companies have originated in Europe, many of them survive only if they find funding in the U.S., or choose to relocate across the Atlantic. But German venture capital firm Techno Venture Management (TVM) may be able to help. It recently closed a €240-million ($287 million) life sciences fund. This is TVM’s sixth fund since the firm was established in 1983; its fifth fund closed in 2001. Europe’s life sciences industry could use the extra cash: In the first half of 2005, European VCs invested €738.2 million ($884.7 million) into 127 life sciences startups, down 5 percent from the €775.2 million ($929 million) they invested into 169 startups during the same period last year.

Hedge Funds Back Biometrics

Biometrics may seem more like science fiction than practical reality, unless you work for the U.S. Department of Defense. A San Francisco-based company wants to make it a reality for every consumer, by pushing biometric payment kiosks out to retailers across the United States. But when four-year-old Pay By Touch needed to raise more money to fund its expansion, it turned away traditional venture capital and looked toward hedge funds.

The startup, which now employs 250, had raised $50 million in two rounds from investors such as Mobius Venture Capital and the Gordon P. Getty Family Trust. It wanted more money to continue acquiring key patents and to accelerate its expansion.

Founder John Rogers didn’t want to lose control by selling more of the company’s equity. “John had talked with four different investment banks and they said it couldn’t be done,” says Pay By Touch Vice President Gus Spanos.

The company was sitting on two dozen issued patents it had acquired around biometric payment schemes. It had paid $30.5 million to acquire ATM Direct from InterCept in November 2004, and management felt its technology was something to take to the bank.

InterCept

So for its next round of financing, the firm took out a $75-million loan. But where do startups go for a loan that large? Hedge funds, which are “doing a lot of private company investing and have a history of sophisticated deal structures,” says Mr. Spanos. “They were very receptive to structuring something with debt that had a small component of equity that was more compatible to our interests than what we could find in the plain-vanilla venture community.”

Och-Ziff Capital Management led the financing with help from Farallon Capital Management and Plainfield Asset Management. Pay By Touch also raised $55 million in convertible promissory notes—which can be turned into shares when the company prices its third round of financing.

“It was clear to me that the hedge fund community would understand this structure better,” says Mr. Spanos.

VCs Dip Into Game Chips

Every holiday season the $25-billion video game industry tries to deliver games with bigger explosions and more realistic battle scenes. Game companies have to aim high because the majority of the industry’s sales fall in the last quarter of the year. That’s also around the time when the Mountain View, California-based startup Ageia hopes to start selling its video game chip, the PhysX, to hardcore gamers. The company says adding the chip to PCs creates a more realistic relationship between objects within a game—a character jumps against the force of gravity, or a car skims a guardrail and actually raises sparks. Though venture firms traditionally shy away from investing in gaming startups, Ageia recently received $27 million in funding from Granite Global Ventures, among other firms. The company will use the money to convince game makers to create titles that take advantage of its technology. It will take a lot of persuasion, though, to get giants such as Electronic Arts to tailor games for Ageia, when Intel itself will run more realistic play on its dual-processing chip.

Granite Global Ventures, among other firms. The company will use the money to convince game makers to create titles that take advantage of its technology. It will take a lot of persuasion, though, to get giants such as Electronic Arts to tailor games for Ageia, when Intel itself will run more realistic play on its dual-processing chip.