« Previous entry | Home | Next entry »

Venture firms are doing well -- a surprise

You'd think the prolificacy of fund-raising by venture capitalists would lead to venture "fratricide," where hungry venture firms invest in competing companies, and drive down profits for everyone.

But that's not happening. Venture capitalists are doing quite well, according to the latest survey by Thomson Financial and the National Venture Capital Association.

We have tried to find holes in the data, and are a bit surprised by it, because it shows all sectors of the venture industry -- from seeding funding to buyouts -- are firing on all cylinders. But we couldn't. Yep, despite all that lavish Web 2.0 spending, and despite basket-case IPOs like Vonage, the guys investing in private companies are doing quite well, thank you very much.

Their profit (or returns) improved in the short term and showed continued stability in the long term for the period ending March 31. At the end of the first quarter, the one, three and five year returns improved for both venture capital and buyout funds compared to the preceding quarter (Q4 2005) and the same period one year ago.

(Clarification: Vonage's IPO, less than three months ago, isn't reflected in this data yet, but early venture backers of the company are still making money on the company, despite its drop to $6 a share.)

For the twelve months preceding March 31, venture capital firms posted a 19.8 percent return on average (note: this often means simply that their return is on "paper" only, reflected by an increase in the worth of the private companies they back). This is up from 13.3 percent from the fourth quarter of 2005.

However, it will be interesting to see how venture firms do if the stock market continues to flag.

There's also the question of whether these figures are overstating things slightly. The venture firms that go out of business, for example, may choose not to report their numbers to Thomson.

We asked the NVCA's John Taylor about this, and he said yes, there is some survivor bias in the numbers. However, he said any overstating is minimal, because the vast majority of the industry's money is managed by a few firms which are "very much on the radar screen."

Thomson gets its data from providing analytical services to limited partners, or those institutions which invest in venture capital firms. Thomson now serves 29 of 31 members of the NVCA board, which itself is a large portion of the industry (and Thomson will soon be listing the firms that are disclosing their IRR results for this data). And for every limited partner it servers, Thomson gets performance reports for all of the venture capital firms (general partnerships) the limited partner has invested in -- even the ones losing money.

Let the (non-) Bubble continue!

TrackBack URL for this entry:

Links to blogs that reference this entry:

From: EarlyStageVC
Are these IRRs illusory?
Excerpt: Matt and Dan are both talking about the IRR uptick in venture capital. We're baaaaack. Maybe. A lot of venture valuation math is based on the subsequent rounds of private investment, not realizations. Realizations is VC-speak for what everyone else
Tracked: August 2, 2006 2:02 PM
From: Firm
Excerpt: Includes case studies and job postings.A firm in New Delhi, India, offering 3D modeling, rendering, graphics, illustration, walkthrough/animation an...
Tracked: August 8, 2006 10:51 PM

Post a comment

Remember personal info?