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.
April 1st, 2009 at 4:16 pm
[...] In Google’s words: Google Ventures seeks to discover and grow great companies – we believe Q1 VC exits were horrible – startable.com 04/01/2009 I recently was pointed to the NVCA’s Q1 venture capital exit numbers, [...]
April 2nd, 2009 at 3:57 pm
quite dramatic figures indeed
April 3rd, 2009 at 12:55 pm
[...] a similar vein to my post from a couple of days ago about how poor Q1 2009 VC exits were, today there are reports that Q1 was also very poor for venture capital funds looking to RAISE [...]
April 23rd, 2009 at 12:35 pm
[...] markets have been virtually shut down in terms of startup IPOs for some time now. In fact, I saw some numbers (via the NVCA) the other day that showed how bad the IPO market has become. There were roughly 86 [...]
May 4th, 2009 at 4:58 pm
[...] One of the more common types of securities used by venture capitalists is the participating preferred stock. This preferred stock is an accepted part of the startup financing landscape, although it has some pretty significant impacts on the value of the common stock (i.e. the stock owned by management and employees of the startup) at an exit. In particular, participating preferred stock can significantly impact the return profile of an investment for a venture investor at a smaller exit value. Exits have shifted from IPOs, where participating preferred holders usually are forced to convert to common shares, to smaller M&A exits, where participating preferred holders have certain… special privileges. (See my recent post on VC backed exits in Q1 2009.) [...]
May 8th, 2009 at 11:45 am
[...] still putting together my thesis on why the technology IPO market is broken (see my post on the sorry state of VC exits & IPOs in Q1 2009). But I’ll give you a clue as to my initial thoughts: 1) the whole IPO market is busted, so [...]
January 6th, 2010 at 8:20 am
[...] able to show a credible path to that $1 billion+ exit. Since the average VC-backed exit is actually something under $100 million, it’s a bit of a "wink, wink; nod, nod" game. Both parties recognize that a more [...]
January 6th, 2010 at 8:49 am
[...] able to show a credible path to that $1 billion+ exit. Since the average VC-backed exit is actually something under $100 million, it’s a bit of a "wink, wink; nod, nod" game. Both parties recognize that a more [...]
January 6th, 2010 at 12:26 pm
[...] able to show a credible path to that $1 billion+ exit. Since the average VC-backed exit is actually something under $100 million, it’s a bit of a "wink, wink; nod, nod" game. Both parties recognize that a more [...]
January 6th, 2010 at 1:03 pm
[...] able to show a credible path to that $1 billion+ exit. Since the average VC-backed exit is actually something under $100 million, it’s a bit of a "wink, wink; nod, nod" game. Both parties recognize that a more [...]
January 6th, 2010 at 8:01 pm
[...] able to show a credible path to that $1 billion+ exit. Since the average VC-backed exit is actually something under $100 million, it’s a bit of a "wink, wink; nod, nod" game. Both parties recognize that a more [...]
January 7th, 2010 at 1:15 am
[...] to show a credible path to that $1 billion+ exit. Since the average VC-backed exit is actually something under $100 million, it’s a bit of a “wink, wink; nod, nod” game. Both parties recognize that a more [...]
January 8th, 2010 at 5:34 pm
[...] able to show a credible path to that $1 billion+ exit. Since the average VC-backed exit is actually something under $100 million, it’s a bit of a “wink, wink; nod, nod” game. Both parties recognize that a more [...]
October 11th, 2011 at 5:51 am
[...] #split {}#single {}#splitalign {margin-left: auto; margin-right: auto;}#singlealign {margin-left: auto; margin-right: auto;}.linkboxtext {line-height: 1.4em;}.linkboxcontainer {padding: 7px 7px 7px 7px;background-color:#eeeeee;border-color:#000000;border-width:0px; border-style:solid;}.linkboxdisplay {padding: 7px 7px 7px 7px;}.linkboxdisplay td {text-align: center;}.linkboxdisplay a:link {text-decoration: none;}.linkboxdisplay a:hover {text-decoration: underline;} function opensingledropdown() { document.getElementById('singletablelinks').style.display = ''; document.getElementById('singlemouse').style.display = 'none'; } function closesingledropdown() { document.getElementById('singletablelinks').style.display = 'none'; document.getElementById('singlemouse').style.display = ''; } Exit Timeline with Venture Capital InvestorsVenture funding slides 50%Q1 2009 venture exits were horrible [...]