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M&A/IPO = Broken ROI Model for VCs?

Last week I was at the WNY Venture Association seminar on “Angel Investing in Western New York.” Not the sexiest market, in particular not for web technology. But some interesting tidbits came out of it — Ron Schreiber (Softbank Capital; Ingram-Micro co-founder) put some interesting nuggets out there. For VC firms, the 10-year annual return (avg) has been:

* 33%, June 2008
* 26%, January 2009
* 14%, June 2009

So why the huge discrepancy within a 1-year timeframe? Because the high returns of the late 90’s bubble drop-off the 10-year returns once 1999 kicked in.

The biggest take-away was him saying that if you’re going to be investing in start-ups, the plan should no longer be in selling the companies — that model is broken. He referenced the single-digit amount of IPO’s this year. He recommended the idea of ‘forced distributions’ as the new investing model — saying that there’s no reason why these companies can’t be funded and provide consistent returns, rather than waiting 5-10 years with your money tied up illiquid and then hoping for a return via merger/acquisition/IPO.

I’m curious what VC’s are currently thinking now, in 2009, when making their investments. Are they still investing with the idea of a merger/acquisition/IPO, or are they thinking of forced dividend returns by their portfolio companies? The number of VC firms is down, which is a reflection of the lack of returns.

Institutional investors backing these VC’s are generally looking for big returns off these high-risk investments, but given the lower VC portfolio returns now, I’d think the institutional investors would love the forced dividend returns to at least get their initial investments back. Maybe the better question is that if a VC were out raising a fund right now, would they still tout the merger/acquisition/IPO, despite the lack of those exits and the 14% 10-yr average return their industry has been providing?

Maybe Fred Wilson, Bijan Sabet, Brad Feld, or some other VCs will write a blog post with their thoughts on this.

  • Brad Feld

    While I like Ron Schreiber a lot and have been a long time friend, I don’t agree with his assertion or the proposed solution. It’ll be interesting to look back in another five years when the 10 year period is 2004 – 2013.

  • Jonathan Volk

    Cool insight in the VC world.

  • purposeinc

    Honestly, the past concept of internet tigers grabbing V.C. money and then spending it all on dreams and ping pong tables, and not on working hard and getting an ROI pisses me off.

    I am thrilled to see that V.C. companies are looking for immediate ROI. Of the dozen or so businesses I have started over the decades every single one of them was cash flow positive within the first year.

    That is promising next time I need to ramp up one of profitable ventures quickly, your blog gave me a little hope to the future of American big business.