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Since When Is 3x a Good VC Return?

Maybe the VC model is broken after all.

The VCs who backed hot digital video recorder maker Pure Digital Technologies Inc. have agreed to sell the company to Cisco Systems for $590 million in stock. At first, it sounds like a pretty good deal, but you have to understand that the VCs put $95 million into Pure, which makes the Flip digital video camera. Assuming they own half of the company, that’s a return of just over 3x their money. For a middle-of-the road VC firm, that would be a decent return, but for big name backers Benchmark Capital and Sequoia Captial that’s pretty much a dud.

Firms like Benchmark and Sequoia (and, more importantly, their limited partners) look for a minimum return of 10x on a deal. You also have to factor in that both Benchmark and Sequoia were in the $13 million Series A round for Pure in May 2004, so that means they put in five years of work for 3x.

This is the clearest sign yet that venture firms don’t expect the IPO market to come back for a long time. Pure’s CEO reportedly said the company will be profitable this quarter. If that’s the case, then there would be no need for the VCs to rush to exit. Unless, of course, they don’t believe the IPO market will come back in a serious way until after next year.