It is basketball season, and an intriguing white paper looks at the Venture industry and suggests a strategy to rebound to premium returns. The authors note recent conflicting trends of larger fund sizes and a decline of IPOs, and argue that the future lies in smaller fund size, considerable consolidation among funds, and exits through M&A.
Most interesting in the analysis is the segmentation of Venture firms by fund size: in the 1980s, funds of less than $250M accounted for 75% of the total; today this group comprises less than 33% of the industry. The 1990s also saw VC-backed companies almost twice as likely to IPO (60%) than to be acquired. However in 2000-2008 that trend had reversed, as IPOs slowed to under one in five (20%). The latter exits were also more modest, as an IPO exit value averaged $407M, while an acquisition yielded $110.
The paper has the hint of convenience to it, since it’s hard to imagine any scenario under which fund sizes don’t shrink. And while the authors also list an impressive group of companies who raised less than $10M — eBay, Oracle, Cisco, Apple, Microsoft, Adobe and VMware — they skip over that all are public companies who found the IPO window. Still, any paper portending a rebound is worth a quick read, even if they don’t sneak in a single Dennis Rodman reference.