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News : Innovation Last Updated: Nov 26, 2010 - 4:01:35 AM

US venture capital companies lost money in the past decade
By Finfacts Team
Nov 25, 2010 - 2:54:26 AM

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US venture capital companies have lost money in the past decade and industry insiders expect the industry to contract in coming years.

Based on end-to-end calculation on data compiled from 1,282 US venture capital funds, including fully liquidated partnerships, formed between 1981 and 2010 and net of fees, expenses, and carried interest, Cambridge Associates' US Capital Index shows a 4.15% loss in the 10-year period to June 30, 2010 and a 5-year gain of 4.27%. There was a 1-year gain of 6.38% compared with a 15% rise in the Nasdaq Composite.

Following a net return of 240% in 2000 and double-digit losses in the following 3 years, the closing years of the decade coincided with the Great Recession. However, as we highlighted recently, there as has been a plunge in IPOs (initial public offering) for young growth companies and this has hit the industry. Facebook is likely to create a lot of excitement in coming years but that is not going to change the underlying trend.

 In Ireland, the challenge for innovation strategy is that VC exits appear to depend on a young firm being acquired by a US company.

Last July, Taoiseach Brian Cowen launched the €500m Innovation Fund Ireland with the participation of the National Pensions Reserve Fund and the expected involvement of US VC companies does not appear likely to meet expectations. Investors have until Friday, November 26th to signal their interest in establishing a presence in Ireland.

The Kauffman Foundation says all net new job creation in any year is dependent on startup companies defined as companies no older than 1 year. Simply the loss of jobs at older firms is offset by new firms.

There are more than 500,000 startups in the US annually and according to a 2009 Global Insight study, venture-backed companies accounted for 12.1m jobs and $2.9trn in revenue in the United States in 2008.

 However, VCs only fund a small number of startups.

In 2008, VCs invested $28.3bn in 3,808 deals, the first yearly decline since 2003, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thompson Reuters.

In 2009, 125 US VC funds raised $13.6bn from investors down from 203 funds that raised $28.7bn in 2008 and down from 217 funds that raised $40.8bn in 2007, according to data tracker VentureSource.

The Wall Street Journal reports that there were 794 active venture-capital firms in the US at the end of 2009, meaning they have raised money in the last eight years, down from a peak of 1,023 in 2005, according to Thomson Reuters and the National Venture Capital Association.

Approximately one-third of portfolio companies fail, so those that do succeed must do so in a big way.

Given the high rate of failure, venture capitalists focus only on innovations that have the potential to revolutionize existing industries or give birth to new ones.

Venture capitalists in the United States widely expect their industry to contract while those in emerging markets, including China, India and Brazil, expect to see expansion over the next five years, according to the 2010 Global Venture Capital Survey by Deloitte and the National Venture Capital Association, published in July 2010.

According to the survey results, more than 90% of US survey respondents expect the number of venture firms to decrease between now and 2015, while a majority of venture capitalists in China, India and Brazil anticipate adding more venture firms in their country during the same time frame. Venture capitalists in Europe and Canada also expect an industry contraction in their respective countries though to a lesser extent than in the US.

Factors cited most often for an unfavorable investment climate in the US were difficulty in achieving successful exits (88%); unfavourable tax policies (59%) and unstable regulatory environment (53%). Deloitte said the prevalence of these challenges represents a stark contrast to responses five years ago when the survey posed a similar line of questions.

National Venture Capital Association: Industry Statistics

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