The Good-But-Not-Great News About Venture Returns

Venture returns are improving, but it’s still too early to say we’ve seen the last of poor industry performance.

With the exception of the 15-year returns, which declined slightly, venture capital performance improved across all time horizons from the end of Q3 to the end of Q4 2010, according to Cambridge Associates and the National Venture  Capital Association.

From Q3 to Q4, one-year returns jumped from 8.2 to 13.5; three-year returns went from -2.1 to -0.3; five-year returns improved from 4.3 to 5.67; 10-year returns went from -4.6 to -2.0; 15-year returns fell from 36.9 to 34.8; and 20-year returns improved increased from 25.6 to 26.3, according to the report. (See table below.)

As of Dec. 31, VC fund performance also beat public market indices over the last five, 15 and 20 years. (One-year returns for late- and expansion-stage funds pretty much killed those same indices, for what it’s worth.)

An increasingly brisk IPO market is helping, of course. A full 125 companies — a fifth of them tech companies — sat in the IPO pipeline by the end of the first quarter, according to Ernst & Young. That’s up from 80 companies in the first quarter of 2010.

Valuations are also seeing a boost thanks the M&A market. According to first-quarter data from PricewaterhouseCoopers, M&A deal value was up 3 percent in the first quarter over the fourth quarter, and was up 10 percent over the first quarter of 2010. (Transaction volume had actually fallen 27 percent from the fourth quarter of last year, but the first half of the year always tends to be slower than the second half.)

NVCA President Mark Heesen says we should “expect these performance numbers to continue on a steady upward trajectory through the remainder of 2011 and beyond.” (That’s barring outside macro factors, which shouldn’t be underestimated, considering the continuing Middle East unrest, not to mention natural disasters like the Japanese earthquake.)

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