The venture industry posted one-year average returns of 16.2% at the end of the second quarter, more than double the 8% returns record a year ago, according to data released last week by Thomson Financial (publisher of PE Week) and the National Venture Capital Association.
On the face of the numbers, the jump in returns suggests that VCs have climbed out of their performance cellar, where the slumped to following the dot-com crash. Returns for the three-year period ended in June reached 9%, up from the 1.4% return that venture investors booked for the three-year period that ended for the same period last year.
However, one-year returns and three-year returns declined from the first quarter. At least part of that fall might be attributed to a slowed down acquisition activity. Acquirers of VC-backed companies paid $3.2 billion to buy startups during Q2, down from $5.3 billion spent during Q1.
No matter how they are sliced, the returns are unlikely to sway limited partner investments, especially the short term-numbers since LP are looking at the 10-year stats, says Kelly DePonte, of placement agent Probitas Partners.
“The one and three year numbers are totally bogus, useless, and don’t mean anything,” DePonte says. “The short term numbers can fluctuate a lot.”
But even the 10-year returns can have big swings. The 10-year return on venture capital is sitting at about 21%, down from the 27.4% returns that were recorded at the end of the second quarter of 2005. DePonte blames the Internet boom for inflating returns on one side and the bust for suppressing them on the other. “It’s like the boa that swallowed the pig and is still trying to digest it,” he says.
The third quarter does not promise to boost returns. Only eight venture-backed companies went public during thex three months, raising about $934 million. It was the slowest quarter since 2003, according to the Exit Poll report by Thomson Financial and the NVCA. In contrast, 19 VC-backed companies went public and raised more than $2 billion in Q2, and 19 VC-backed startups raised nearly $1.5 billion during their IPOs in Q3 of 2005.
With IPO liquidity limited, VCs are increasingly turning to strategic acquirers to step in and buy up their portfolio. But even there the numbers are down. Buyers picked up 74 venture-backed startups for a disclosed value of $2.7 billion in the third quarter, according to Thomson Financial and the NVCA. Those figures were down from the second quarter of this year, when 91 VC-backed startups were acquired for a disclosed value of $3.74 billion. The Q3 total was also down sharply from the same period a year earlier, when 98 VC-backed companies were snapped up for a disclosed value of $4.37 billion.
“A lot of the high returns in the nineties were based on a raging hot IPO market,” DePonte says. “The question remains, will the IPO market stay cold?” —Alexander Haislip