NVCA Today

A Smaller Industry; Exits Remain Scarce

Against a backdrop of overall economic gloom, the US venture capital industry remains open for business. First time financings are being done for the most promising opportunities and later rounds continue, although on a smaller scale than even a year ago. IPOs remain scarce and the poor M&A exit market we saw in Q1 2009 continued into Q2.

IPO Draught Continues with Few Signs of Better Times in the Near Term

The lack of initial public offerings for venture backed companies has garnered considerable attention. IPOs are generally the most successful form of exit for the venture firms and its investors. Cash raised through the IPO process is distributed to the LP investors which in turn the LPs generally recycle into future venture fund commitments. This ecosystem has stopped working. In 2008, there were a total of 6 venture backed IPOs. There were no IPOs in Q1 2009 and only 5 in Q2. Those 5 IPOs raised less than $720 million. No IPOs in Q2 2008, Q4 2008, and Q1 2009 represent the first, second, and third occurrences of that since the 1970s.

To put the recent IPO drought in perspective: assumption 14% of venture backed companies go public; and 1,100+ come into the system (first time fundings) each year = we would expect 150+ IPOs each year.

Venture Backed Exits - Recent M&A And IPO Activity

M&A Activity Also Slows - Strong Acquisition Valuations Become Scarce

Unfortunately, acquisition exits are not faring much better than the IPO market. There were only 121 acquisitions in the first 6 months of 2009, which is far below the 350 or so annual run rate for much of the post-bubble period. Based on those deals with disclosed prices, those acquisitions that did take place were small. Approximately $3.2 billion was raised through M&A - a small fraction of traditional levels.

What's Happening in Investment?

Venture investment levels had remained in $20-$30 billion annual run rate for much of the post-bubble period until 4Q 2008. Then the investment pace slowed dramatically. In the first half of 2009, only $6.9 billion was invested. Over 1/3 of the deals in 1H 2009 were later stage, mostly into existing portfolio companies having difficulty going public or being acquired. The trend we saw in early 2007 and most of 2008 with shifting investment toward seed/early stage retreated in 2009. And while 2008 shows a recent high proportion of deals going to the seed/early companies at 38.6%, it is far below the 45%-50% we saw in the late 1990s.

MoneyTree™ Investment 1995-1H09

As noted above, the conflict for venture capitalists' attention and funding between existing later stage portfolio companies and newly-developed business plans continues. Against a backdrop of high-quality deal flow, the industry has nonetheless reduced the number of new portfolio companies it is taking on. Only 290 first time fundings took place in 1H 2009.

MoneyTree Deals - Number of First Time Fundings

Fundraising and Commitments

Fundraising, which for all but the most proven and promising firms had been difficult over the past several years, slowed dramatically as 2008 came to an end. It remains slow in 2009. Institutional limited partners found that plunging valuations in the public markets caused an over-allocation to alternative asset classes such as venture capital. This so-called "denominator" effect made it very difficult for existing limited partners to take on any new commitments, especially coupled with the fact that there have been few distributions by the industry recently.

In 2009, fundraising slowed dramatically with only $6.3 billion raised in the first half.

While the industry does have capital on hand, an ever-increasing portion of that is earmarked for follow-on investment in existing portfolio companies. A prolonged fundraising drought could make future investment difficult.

Fundraising by Venture Funds

Where to Go for the Latest Statistics

Quarterly statistics are posted on the NVCA website. There are four information releases for a typical quarter:

• Exit Poll (IPOs and Acquisitions) - typically published a day or two after each quarter end
• MoneyTree (Money invested by VC firms in portfolio companies) - Officially known as the "PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, with data provided by Thomson Reuters." This is typically released 3-4 weeks after the close of the quarter. Shortly after that, searchable statistics and downloadable spreadsheets can be found at www.pwcmoneytree.com.
• Fundraising (Commitments) - Typically released around the time of MoneyTree
• Performance (IRRs) - Beginning with Q1 2009, Cambridge Associates and NVCA will release quarterly return information lagged just over one quarter. A new selected benchmarks report will be posted on the public side of the NVCA website and an expanded report will be available to NVCA members in the Members Only website.

The NVCA 2009 Yearbook, available as PDF file to NVCA members, provides historical data back to 1980. You can download your copy from the NVCA website.

NVCA members who subscribe to VentureXpert can access the data anytime, even as it is being accumulated and posted at quarter end. For more information about the NVCA research program, contact John Taylor at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Significant NVCA member discounts are available for online subscriptions to Thomson One Banker VentureXpert database. Contact http://www.thomsonreuters.com/products_services/financial/contactus?bu=financial for more information.