Last night I attended a dinner where Mark Heesen, President of the National Venture Capital Association, spoke for a little bit about the state of the venture capital industry. One of his major topics was around the poor exit market for venture capital backed portfolio companies. The number of IPOs this year for venture backed companies has been ridiculously low (I think he said only 6). The time from first funding to IPO for the companies that have been able to go public has lengthened to 8.5 years, the longest time period since this metric was tracked. This means that the “hold time,” i.e. the amount of time that VC’s are actively supporting a business with their fund, has gotten longer.
The increase in hold time could mean that the number of new startups receiving venture backing over the next few years could decrease. This would be caused by two primary factors:
- If VCs need to increase their reserves for existing portfolio companies then they will have less “unallocated” funding to invest in new companies. If a VC fund with a $200 million fund allocates, on average $7M per investment they would make about 28 or 29 new investments per fund. If they are forced to increase the amount per company to $10 million to support investments longer to liquidity then they would only make 20 investments from that fund.
- If the average venture capitalist tries to sit on 6 to 8 boards at a time, and the amount of time for their current investments to exit is increased then they will be “stuck” on their existing boards for longer, thus not freeing them up for new investments. For example, if a given partner has 8 board seats now and does not exit a portfolio company for two years then they may not have the time to execute and support more than one new investment during that period.
On the plus side, large corporations continue to make acquisitions. IPOs are not the only exit method available to VCs. Additionally, startup CEOs are usually quite nimble, and many can make smart business decisions that reduce their cash burn or (believe it or not) get their companies to profitability.
