I recently was pointed to the NVCA’s Q1 venture capital exit numbers, and the only conclusion that can be drawn is that:
Q1 2009 venture backed exits were horrible
No surprise here, but still, seeing it in a chart hits home how poor Q1 was this year. (These charts were released recently by the National Venture Capital Association.)
Wow. That’s a banana in Q1. Not a single IPO. I think the really important thing here is to realize a few things about IPOs – they are more than just events that make venture investors money. These are funding events for companies that have grown beyond the startup phase. IPO proceeds are used to hire new employees, write the next version of the product, expand facilities and make (hopefully) intelligent acquisitions to round out product lines and gain access to new distribution channels. The lack of IPOs in Q1 and the poor showing in 2008 will do more than just delay wealth creation: it will slow innovation.
M&A exits were not much better (but at least there were some.)
The real impact of this downturn in M&A can be seen by the average exit value for M&A this quarter. Not only were there fewer exits but their value has plummetted:
The average M&A exit value dropped by more than half. Note that a $50 million exit is not a home run for most VC investments. At that level of exit, if a VC was to make 5x their money on a $5 million investment they would have to own almost half the business! (the math works as follows, assuming a 1x liquidation preference and no other money into the company than the VC gets their $5 preferred return plus will need at least $20 million in common stock returns to get to a 5x, $25 million return – $20 million on a $40ish common stock return is about half the company.) That’s not a very realistic capital structure, at least from what I’ve seen, so I don’t think most VCs were jumping up and down for their average exit value this past quarter.
Early in the post I mentioned that the lack of exits impacts more than just wealth creation. The capital returned from exits is often recycled back into other startups by a variety of means, either by limited partners investing in new venture funds, venture capital funds using some early returns to cope with over-allotment issues in existing funds, and entrepreneurs taking the wealth they have created in seed funding/starting new companies. If this period of poor exits continues for an extended period of time we could see a serious slow-down in financing for new technologies.