By Carl Grant, Senior Vice President of Business Development at Cooley LLP
Let’s face it, economic returns have been grim during this last recession. The latest report from National Venture Capital Association is further proof of that.
According to the NVCA report, venture capital investments took a negative turn at the end of 2009, and plunged during Q1 2010. Over a 10-year period for the quarter ending in March 2009, VC funds returned 25.8%. For the quarter ending in March 2010, that return took a nose-dive to minus 3.9%.
With a normal venture capital investment, the 10-year ROI is the true benchmark of the investment. Investors look at their IRR on an investment portfolio over a 10-year period to determine its success.
So why was there such a big decline? The immense gains of the dot-com boom have finally flushed out of the 10-year benchmark. Hopefully, the survivors in the VC industry have learned from the dot-com boom and bust and have corrected their practices to ensure such an enormous decline does not happen again.
Since that time, there has also been a major decline in the number of companies filing for IPOs. VC firms count on having a portion of their portfolio companies filing for IPOs for major returns on their investment. As such, the industry is waiting breathlessly for the IPO market to make a stronger comeback to compensate for failed investments. In the meantime, be on the lookout for more private equity exits and alternative trading platforms like Second Market to provide liquidity for early investors and holders of otherwise illiquid securities.
There is no call for alarm with the NVCA report or the grim numbers. This is natural part of the expansion and contraction of this sector of the economy. The late 1990s and early 2000s were an outlier. Venture capital is finally adjusting to a normal pattern with normal exit lengths. If you look at historical activity going back to 1995 it puts it all in perspective.
We would all like to see another boom like we saw in 1999, but in the meantime we need to focus on creating great, enduring companies rather than quick exits.
In fact, a recent report from Cooley LLP supports this positive outlook. While we observed fewer up rounds in funding during Q2 2010 compared to Q1 2010, we’ve seen increased optimism from investors. We will continue to see financial ups and downs while the economy continues to recover, but a little optimism will go a long way.
Disclaimer: The postings on this site are my own and do not represent Cooley LLP’s positions, strategies or opinions.