This significantly understates the numbers because it doesn't include secondary transactions, which are increasingly common for founders and early investors.
This was most interesting: the median acquisition price is now $71M (up 77%) with 5.3 years to liquidity. Takes lots of time but potentially incredibly lucrative
Lucrative for founders, I suppose, probably decent return for VC's. For early employees, not so sure. Going on eight years (7.5 years for me personally) on current company, wondering whether it's worth it.
It's interesting to see a decline in the total value of deals in Q4, despite the fact that both Groupon and Zynga had their IPOs in that quarter. I wonder whether there's any seasonality that typically affects these transactions or whether there was a bit of a slowdown from the previous few quarters.
It's also interesting that only $5.4 billion, or roughly 10% of the total value of deals, came from IPOs during the year. For all the attention IPOs get, most of the money is coming from somewhere else.
10-year IRRs are negative during the period that Google went public! The customers of the VCs (primarily pensions and endowments) are beginning to look with jaundiced eyes...
> 10 year returns across the Nasdaq Composite and S&P500 were garbage during that time. It's not just VCs. Everything is correlated.
That's the problem: They are not supposed to be, or certainly not a coefficient of 1. So the portfolio managers are wondering, Why the hell am I paying 2 & 20 for something I can get in an index?
Truthfully, why does anyone buy any particular asset expecting to do better than the market? The short answer, I think, is that they perceive the information and access that they have to be relatively great enough (than other market actors) to eek out an edge over the market. People's perceptions aren't always right, and the very definition of recessions (something that happened once or twice in the last "decade") is that entrepreneurs make a cluster of errors all at once.
As for the "why," I'm sure a particular's VC's perception of a startup investment falls favorably on their own risk-reward scale, and is perceived to be in line with the time horizon for their investment (whatever that may be). To believe them or not is up to you, and is the result of your own perceptions given the information available.
> Truthfully, why does anyone buy any particular asset expecting to do better than the market?
The portfolio managers do not. They want a basket of assets, ideally with an expectation value and standard deviation.
Read up on Modern Portfolio Theory, which is a typical entry point on portfolio management, if you are curious why expecting to do better than the market is irrelevant. (Despite the name, MPT is not very modern.)
Edit: Note also, when I said portfolio manager above, I meant the customers of the VCs, not the VCs themselves.
I think we're on the same page on this one. I was mostly trying to explain this sort of behavior based on the (semi-)efficient market hypothesis, and its implications.
VC's (and their customers) tend to portend some sort of knowledge that a sufficient portion of other market actors are unaware of, or are unable to act on. If you (a VC customer) believe the VC, and perceive his reasoning to be correct, that's all fine and good. Don't expect to win every time, though, which I guess was the point of this thread.
That said, thanks for pointing my direction to the MPT!
The real issue is that VC was over-capitalized in 1999-2000. More capital chasing the same investments bids up valuations and increases copycat competition, which both lower returns.
It takes a looong time to rebalance the supply of capital since PE/VC funds typically raise their next fund before the results of their current fund are realized. So the venture landscape was likely overcapitalized from 1999-2005, if not longer.
Has the balance come back or do we again have too much money chasing too few great companies? Given the choice, I prefer to have more capital in the system. More funding for entrepreneurs.
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[ 4.3 ms ] story [ 39.9 ms ] threadThis was most interesting: the median acquisition price is now $71M (up 77%) with 5.3 years to liquidity. Takes lots of time but potentially incredibly lucrative
The original release has better data: http://www.dowjones.com/pressroom/releases/2011/01032012-VCE...
It's also interesting that only $5.4 billion, or roughly 10% of the total value of deals, came from IPOs during the year. For all the attention IPOs get, most of the money is coming from somewhere else.
10-year IRRs are negative during the period that Google went public! The customers of the VCs (primarily pensions and endowments) are beginning to look with jaundiced eyes...
S&P: -20% (2000-2009), -3& (2001-2010) Nasdaq: -40% (2000-2009), +4% (2001-2010) (google finance)
That's the problem: They are not supposed to be, or certainly not a coefficient of 1. So the portfolio managers are wondering, Why the hell am I paying 2 & 20 for something I can get in an index?
As for the "why," I'm sure a particular's VC's perception of a startup investment falls favorably on their own risk-reward scale, and is perceived to be in line with the time horizon for their investment (whatever that may be). To believe them or not is up to you, and is the result of your own perceptions given the information available.
The portfolio managers do not. They want a basket of assets, ideally with an expectation value and standard deviation.
Read up on Modern Portfolio Theory, which is a typical entry point on portfolio management, if you are curious why expecting to do better than the market is irrelevant. (Despite the name, MPT is not very modern.)
Edit: Note also, when I said portfolio manager above, I meant the customers of the VCs, not the VCs themselves.
VC's (and their customers) tend to portend some sort of knowledge that a sufficient portion of other market actors are unaware of, or are unable to act on. If you (a VC customer) believe the VC, and perceive his reasoning to be correct, that's all fine and good. Don't expect to win every time, though, which I guess was the point of this thread.
That said, thanks for pointing my direction to the MPT!
It takes a looong time to rebalance the supply of capital since PE/VC funds typically raise their next fund before the results of their current fund are realized. So the venture landscape was likely overcapitalized from 1999-2005, if not longer.
Has the balance come back or do we again have too much money chasing too few great companies? Given the choice, I prefer to have more capital in the system. More funding for entrepreneurs.