March 12, 2007
Startling VC Statistics!
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…