NVCA Today

Despite the widespread turmoil in the US and global economies, the venture capital industry is very much open for business. Yet, there are very real challenges. The industry is faced with conserving capital at portfolio companies while working to create exits for the more mature portfolio companies. Today's portfolio companies also need to develop and sell products and services in a generally unreceptive economy - especially in the consumer and commercial IT sectors. But all of this is balanced by reports of record levels of high-quality deal flow and teams coming to the attention of venture capital firms.

As these latest statistics show, there are an ever-increasing number of companies stuck in the later stages awaiting exits. In each of six of the last seven quarters, there were more than 300 later stage deals. Levels at or above 300 deals were unheard of until the second quarter of 2007. While Q4 of 2008 showed significant slowdown in several metrics including first-time fundings, the industry did fund more that 1,100 first time companies in 2008. Investment continues.

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

Understandably, the lack of initial public offerings for venture backed companies has garnered considerable attention. IPOs are generally the most lucrative form of exit for the venture firms and their investors. Funds raised through the IPO process are distributed to the LP investors and then are generally recycled by the LPs back into future venture funds. Currently this ecosystem is blocked. In 2008, there were a total of 6 venture backed IPOs. There were 5 in the first quarter and 1 in the third quarter. In the second and fourth quarters there were no venture backed IPOs at all - the first and second time respectively in 30 years that happened.

To put 2008 IPO activity in perspective, assuming 14% of venture backed companies go public and 1,100+ come into the system each year, we would expect 150+ IPOs each year.

Source: Thomson Reuters & National Venture Capital Association
*Only accounts for deals with disclosed values
**Includes all companies with at least one U.S. VC investor that trade on U.S. exchanges, regardless of domicile.

The NVCA has taken on a study and review of this capital markets crisis and is working on actionable recommendations for a healthier exit environment. One obvious concern is the money fleeing the public stock markets. The year end mutual fund industry reports that while $93 billion of investor cash flowed into stock mutual funds in 2007, in 2008 $234 billion flowed out (www.ici.org)!

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

The left side of the "Venture-Backed Liquidity Events" chart describes acquisition exits. While the total count of acquisition exits remained above 300, these deals reflected a wide range of varying quality and success. Activity slowed considerably in the fourth quarter. Overall for the year, the deal counts fell just 7% but the disclosed dollars realized fell 55% suggesting poorer outcomes.

If you combine the $13.2 billion in disclosed acquisitions and the mce_marker.5 billion in IPOs, even with an unreasonable assumption of 100% ownership by venture investors, distribution potential was well below the $28.3 billion the industry invested in 2008.

While IPOs generally provide good results to the venture investors, an "acquisition" exit can be a home run, fire sale, or something in the middle. The chart "Analysis of Transaction Values versus Amount Invested" segments acquisitions by success level. Of the 107 acquisitions in 2008 with disclosed selling prices and complete funding information, 30 sold for less than the capital invested by venture investors. Another 30 sold for 1x-4x venture investment. In fact, only 20 sold for 10x or more venture investment, significantly below the 2007 count. If you assume that many of the non-disclosed deals were less successful, acquisitions exits overall were not a great alterative to an IPO.

Source: Thomson Reuters & National Venture Capital Association
* Disclosed deals that do not have a disclosed total investment amount are not included.

What's Happening in Investment?

As a result of a weak fourth quarter, venture investment in 2008 fell from 2007 levels but it remained above 2006 levels. Nearly a third of venture deals are going into later stage companies. The industry has never seen levels this high. With exits far too scarce, many promising companies have arrived at the later stage maturity unable to move on. Reports from the field are that this historically high number of later stage companies is preventing venture capitalists from turning attention toward the next crop of companies. The statistics bear this out. While the percent of deals going to seed and early stages portfolio companies is at post-bubble highs, it is far below the level seen in the mid-1990s.

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTreeTM Report, Data: Thomson Reuters

Clean Technology Venture Capital Investment

Not surprising, venture investment in clean technology companies now exceeds 14% of all US investment and continues to grow in terms of both share and dollars. With the prospect of significant federal government support of this sector, it seems poised for further increases. As anticipated by many, the average deal size for this sector is roughly double the average across all sectors and increasing.

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree^TM Report, Data: Thomson Reuters

Fundraising and Commitments

Fundraising, which for all but the most proven and promising had been difficult over the past several years, slowed dramatically as 2008 came to an end. 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.

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

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^TM 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) - Thomson compiles venture capital IRR benchmarks and these are released with at least one quarter lag by the NVCA and Thomson. Buyout and mezzanine return statistics are released directly by Thomson.
  
  

The NVCA 2009 Yearbook, available as PDF file to NVCA members, provides historical data back to 1980. A copy can be downloaded from the NVCA website starting mid-April.

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 ThomsonOne with the VentureXpert database. Contact http://www.thomsonreuters.com/business_units/financial/contactus?bu=financial for more information.