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
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
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.
one-third of portfolio companies fail, so those that do succeed must do so in a
Given the high rate of failure, venture capitalists focus only on innovations
that have the potential to revolutionize existing industries or give birth to
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