Return of the Happy Ending?


The first quarter exit numbers were overwhelmingly positive, as the NVCA reported the highest quarterly transaction total for VC-backed acquisitions ever, with 111 deals representing almost $6 billion in value. Likewise, the public markets began to open again, as there were nine VC-backed IPOs raising over $930 million in Q1, compared to just 8 total VC-backed IPOs in all of 2009 (full data is here in PDF). Moreover, it appears that venture fundraising grew over an anemic 2008, with multi-stage funds garnering the lion’s share.

NVCA’s analysis of the M&A deals compared the transaction value to the amount of venture money invested.  For disclosed deals, fully 31% had a transaction value less than the total venture money invested, and 24% returned 1-4X. Another 31% had a transaction value of 4-10X venture investment, while 14% had transaction value of 10X or greater. Now this comparison is somewhat askew, as VC firms will not own 100% (or usually even a supermajority), so a 4X return implies that a venture investor probably received considerably less than 4X.

Now, back to VC math: my unsupported belief is that the deals that fail to return venture investments are much more likely to be undisclosed, while acquisitions by public companies are far more likely to be both larger and disclosed, so I expect the data skews positive.  However, even if it did not, at least 55% of the exits returned less — most of them much less — than 4X, which would not meet the return threshold of most firms.   The venture industry’s ability to predict the future is deeply flawed, and optimist here should be tempered. With the golden era of venture investing now off the books, the ability to sustain returns will largely determine the future health of the venture industry, and access to capital for many entrepreneurial companies.