Monday, March 12, 2007

Don Dodge say VCs invest $40 billion with only $18bn in exit: some addional data points

Don Dodge has written an excellent piece Venture Capitalists and Angels invest $40 Billion per year but see only $18B in exits that Jeff Nolan and Jason Wood have commented on(hat tip to ). The core thesis of his post is that "exits have averaged $18B over the past 6 years while investments have averaged about $40B over the same time period. "

He further adds-
This can't go on forever. Or, maybe it can. Gamblers lose billions of dollars every year in Las Vegas...and have been happy to do so for over 50 years. VCs and Angels are big time gamblers and they love the game. One winner erases all the losers in their mind. I completely understand that because I think the same way.
Now as much as I love Black Jack as the next guy, I think these numbers may not reveal the full truth. The total value of all IPO exits for VCs is reported as $28.4 billion. I suspect that this figure is based on valuation at the time of the IPO. Let me prove by contradiction. (Okay, proof is a strong term, let me illustrate by way of an example.)

Google: Now here are some numbers reported to SEC (accoding to Venture Beat).
According to Google’s filings with the SEC, Sequoia Capital owns 23,893,800 shares in Google, now worth $4.42 billion on paper, and Kleiner Perkins has 21,043,711 shares, worth $3.89 billion on paper.
Now this was more than a year ago. Since then the value of the Google shares has gone up further, and the combined stake for the two VC firms in Google today would be $20,221,879,950 (at $450 a share, current prices). That is over $20 billion.

Yes, this argument is using the best case example. But I would surmise (and bet) that the same is true for other big exits. Salesforce.com investors for example 'exited' the company by way of an IPO at $11 i.e., less than $1 billion (market cap). Today the stake is worth 5 times the amount.

In that sense, an IPO exit is much more preferable than M&A because it allows further appreciation even after the exit.

At the same time, I do agree that the market value represented by the IPO price is an accurate measure. The fact that some shares appreicate in value after the IPO is supposedly reflected in the share prices.

What do you think? Are these calculations wrong? Or am I missing something very basic here?

2 comments:

Jason Wood said...

Anshu,

Excellent observation although I think it perhaps further illustrates the idea of how lopsided venture returns can be. In that one example, a few select VC firms would be responsible for billions more of unrecognized exit gains.

Certainly the key here is whether or not VCs hold shares post the lockup. In certain cases (like the Google example), we have evidence that they do.

But ultimately VCs are in the business of returning capital to their investors, so I would say it's highly unusual to see such mammoth holdings so long after the IPO.

At worst, you've helped shine the light on the kind of inefficiencies that make Don's data contrast against the perceived returns of the venture business.

At best, you've helped close the gap considerably.

J

P.S. It's Wood, not Woods :)

Anshu Sharma said...

I agree that it is not the job of the VCs to maintain equity positions. I wonder if they can distribute equity to the investors. At that point, the VC can no longer show the returns on his books but there continues to be a lucrative upside for the investors.

In all, this is a very interesting topic.

Anshu
p.s.- Sorry for the Woods, changed it to Wood.