Short-term performance surges

The venture industry posted a one-year average return of 16.2% at the end of the second quarter, more than double the 8% return record a year ago, according to data released in November by Thomson Financial (publisher of VCJ) and the National Venture Capital Association.

The jump in returns suggests that VCs have climbed out of their performance cellar, which they fell into following the dot-com crash. Returns for the three-year period ended in June reached 9%, compared to a three-year return of 1.4% posted in June 2006.

No matter how they are sliced, the returns are unlikely to sway limited partner investments, especially the short term-numbers, since LP are looking at VC performance over 10 years, says Kelly DePonte, a partner with placement agency Probitas Partners.

“The one- and three-year numbers are totally bogus, useless, and don’t mean anything,” DePonte says. “The short term numbers can fluctuate a lot.”

But even the 10-year returns can have big swings. The 10-year return on venture capital is sitting at about 21%, down from the 27.4% returns that were recorded at the end of the second quarter of 2005. DePonte blames the Internet boom for inflating returns on one side and the bust for suppressing them on the other. “It’s like the boa that swallowed the pig and is still trying to digest it,” he says.

The third quarter does not promise to boost returns. Only eight venture-backed companies went public during the three months, raising about $934 million. It was the slowest quarter since 2003, according to the Exit Poll report by Thomson Financial and the NVCA. In contrast, 19 VC-backed companies went public and raised more than $2 billion in Q2, and 19 VC-backed startups raised nearly $1.5 billion through IPOs in Q3 2005.

With IPO liquidity limited, VCs are increasingly turning to strategic acquirers to buy their portfolio companies. But even there the numbers are down. Buyers picked up 74 VC-backed startups for a disclosed value of $2.7 billion in the third quarter, according to Thomson Financial and the NVCA. Those figures were down from the second quarter of this year, when 91 VC-backed startups were acquired for a disclosed value of $3.74 billion. The Q3 total was also down sharply from the same period a year earlier, when 98 VC-backed companies were snapped up for a disclosed value of $4.37 billion.

“A lot of the high returns in the nineties were based on a raging hot IPO market,” DePonte says. “The question remains, will the IPO market stay cold?” —Alexander Haislip