March 12, 2007

Startling VC Statistics!

Posted in finance at 11:47 am by scottmaxwell

Don Dodge has done some great analysis in his post Venture Capitalists and Angels invest $40 Billion per year but see only $18B in exits. The bottom line is that it appears that the relationship between investments made by VCs vs. the exits that have been generated suggest pretty significant losses (unless the market cap of VC portfolios is significant!). While it is difficult to match investments made with actual results, Don’s conclusions are difficult to argue with. There is probably a lot of accumulated value in VC portfolios that is not evident in the data yet, but there will have to be some pretty significant increased M&A and/or IPO activity in order to get positive multiples out of the industry (i.e., your average exits over time divided by your average investments needs to be greater than 1!).

Don’s analysis raises a some issues:

  • Strange that every VC I talk with has great results yet the totals look so poor…how can this be?
  • Is it possible that the market value of VC portfolios is multiples of past years?
  • If the conclusion from this analysis is correct, how does the industry get back to equilibrium? Fewer VC firms? Fewer VCs at the firms? Less capital at the firms? More firms moving into private equity?
  • Are the large companies seeing such low ROI from their investments in new technologies? If so, should they be doing less R&D and acquiring more, thereby allowing the VCs to fund their R&D?
  • Do current VC portfolios (not taken into account in the analysis) represent such a large value that there will be a flood of exits in the next few years?

It should be an interesting next few years in the industry…

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7 Comments »

  1. Maybe what we need is a little more transparency. Of course the VC’s will howl because they like to keep things secret.

    It’s fascinating to watch all this played out in the blogsphere. All those teams that people talk about – looks like at least 50% of them are shall we say struggling to execute on a plan.

    Interesting times indeed.

    Peter

  2. scottmaxwell said,

    all good points Peter…
    S

  3. Daniel Nerezov said,

    James Chen has kindly posted some complementary stats from Thomson….

    It seems Don’s analysis uses a 4 year holding period when Thomson’s stats show that early stage only turns positive at 5 years+

    erhh…so much for making a quick buck

    http://www.purevc.com/pure_vc/2007/03/private_equity_.html

  4. scottmaxwell said,

    Thanks for the note and the stats Dan. No matter how you slice it, the $ amount of exits is going to have to grow by a factor of 4+ just to get VCs to 2x multiples on their money (which is below their targets). The interesting thing to me about Don’s analysis is that no perfecting of the analysis changes this math much. If exits increase this much, it will be an interesting time. If they don’t, it will be an interesting time…
    S

  5. Yi-Jian Ngo said,

    I wonder if the increasing amount of capital comandeered by private equity funds will contribute to the “flood of exits”? Given that about 30% of tech M&A in 2006 was PE-backed, it is possible that private equity firms could become a significant liquidity option for VCs, in addition to IPOs and strategic sales.

  6. johndthornton said,

    The historical 20 yr avg for vc is roughly 16%. To make that on $35b of inflows year in and year out, you need to be at roughly 2.25x *net*, or 80-85b per year in distributions. That’s happened exactly once in the history of the industry.

  7. Naghma said,

    All points are good…….


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