We’ve been saying for a long time that we’ve got tool our business for a permanently compressed exit environment. This week, the NVCA put a fine point on that argument, as reported by the WSJ:
In the second quarter, the total disclosed value of venture-backed M&A in the U.S. came in just shy of $2.4 billion, down nearly 40% from $3.97 billion in last year’s second quarter.
The languid economy is a big factor limiting deal activity. But if IPOs are down also, “all of a sudden, you don’t have pressure on a buyer to buy a company before they go public,” which can reduce the price a buyer is willing to pay, or scuttle deals altogether, says Jim Fulton, a partner with law firm Cooley Godward Kronish LP in Palo Alto, Calif. Cooley lawyers advised companies on eight IPOs in 2007, but have done only one so far this year. “We’re clearly off the pace,” Mr. Fulton says.
While this quarter may be an aberration, it’s bleakness can’t be overstated:
-$35bilion per year coming into the industry
-Average trailing return of roughly 15%
-Roughly $80 billion needs to be distributed PER YEAR, EVERY YEAR to sustain that 15%. That has happened exactly once in the history of the venture industry, which was of course in 2000. And even in that year, commitments by LPs exceeded distributions.
-So if there were no IPOs in Q2, and an annualized run rate of roughly $10b in M&A, let’s be generous and say that VCs owned 70% of the companies. That means q2 distributions were 91% BELOW where they would neeed to be to sustain historical IRR levels.
Of course this math is way, way oversimplified. But it’s not that far off.