Coming rise of venture capital zombie funds after peak valuations
The Wall Street Journal reports this week on chatter from the Digital Life Design (DLD) tech conference in Tel Aviv on the expected rise of venture zombie funds — venture capital vehicles that deployed investors’ capital at peak valuations but can’t sell off at a profit.
In the Digits blog, the Journal reports data from sister-company Dow Jones VentureSource, of the 46 independent and corporate VC firms founded in Europe in 2011, 42 were still in operation through this past 31 Aug 2015. But "they’re making fewer investments: 389 in 2012, 252 in 2013, 57 in 2014, and only three as of the end of August this year."
In the US, investment is still increasing. According to VentureSource, the amount invested by VC firms in the first half of 2015 rose to $35.9bn (1,960 deals) from $57bn (3,906 deals) in all of 2014.
“We’re in a period of euphoria now. Get ready for a new wave of zombie VCs,” said Yossi Vardi, a serial Israeli entrepreneur and organizer of the DLD conference. “In 1999, there were about 100 venture capital funds in Israel — they turned into zombies, and most are now gone.”
Research by the US Kauffman Foundation, America's leading entrepreneurship think-tank, using data from Inc. magazine's 500|5000 list of fastest-growing companies in America, found that in a sample of almost 500 high-growth companies, less than 7% of such firms have received venture capital.
Dow Jones VentureSource has reported that 25 Europe-based venture capital firms raised more than €2bn ($2.2bn) in the second quarter of 2015 from April through June, twice more than in the first quarter. It’s a 30% increase compared to the same period last year. The largest fund of the quarter was Index Ventures Growth Fund III, which raised €650m, accounting for 32% of the total amount raised for 2Q 2015.
Almost half of the total amount was raised by venture capitalists that invest in early-stage startups.
European companies raised just over €3bn for 357 deals during 2Q 2015, an increase of 12% in the amount raised from 1Q 2015 despite a 5% slide in the number of deals completed. In contrast with the year ago period, investment improved by 31% despite a 15% reduction in the number of completed deals.
Consumer Services was the strongest sector of the quarter in terms of attracting investment followed by Business and Financial Services. The sectors garnered 45% and 24% of all euros invested during 2Q 2015
The United Kingdom was the most favoured destination for equity financing during 2Q 2015, receiving €645m across 89 deals. The country took 21% of all equity financing for the quarter, despite a 28% fall in investment from 1Q 2015. Sweden placed second, attracting a 19% share of European financing. Investment reached a total €596m, bolstered in large part by Spotify Technology’s most recent round of financing in April. Germany occupies third position raising €508m, 17% of the total for the quarter. France placed fourth with a 15% share, raising €449m during 2Q 2015.
Recent amounts are still below those of the late 1990s dot-com boom, when investors rushed into venture firms: In the second quarter of 2000, European VC firmed raised $3.9bn (€3.5bn), according to Dow Jones VentureSource data.
US-based companies raised $19bn in 1034 venture capital deals in 2Q 2015, a 15% rise in capital raised, with number of deals also experiencing an increase of 12% from the previous quarter.
Compared to the same period in 2014, amount invested went up 24%, while number of deals experienced a minimal decrease.
Business and Financial Services is the strongest sector with 30% share of total amount invested.
A 2012 report, "WeHave Met the Enemy … And He is Us" was based on a comprehensive analysis of the Kauffman Foundation's more than 20 years of experience investing in nearly 100 VC funds. the report said: "It illustrates a persistent pattern of inflated early returns in funds that may be used to raise subsequent funds and shows the poor historical performance of funds with more than $500m in committed capital."
Here are comparisons of VC fund performances in 2014 and up to 30 years compared with public indexes.