This report details the state of the venture capital industry and detailed industry statistics for the past twenty years, including commitments, disbursements, IPOs, acquisitions and performance.

Summary:

In 2007, while the venture capital asset class in the United States reached post-bubble highs in both capital raised (commitments) and investment in companies, overall capital under management declined. These increased levels of commitments and investment remained at roughly one-third of bubble levels. The decrease in capital under management is not unexpected as large bubble-era funds end and they are replaced with fewer and smaller funds raised recently.

For a healthy venture capital industry, both the initial public offering (IPO) and acquisition (M&A) markets must be complementary and strong. The exit scene in 2007 showed some improvement in each but it was not sufficient to absorb the backlog of companies now in the later stages of maturity.

The most recent industry performance index continues to show that over the long haul the industry pays 15-20% IRR to its investors. All indications are that this will continue. Recent short-term performance has been stronger driven in part by volatility in the public markets and the large number of companies in the later stages. It is not likely that recent short-term returns are sustainable or indicative of longer term results.

Introduction

The 2007 National Venture Capital Association Yearbook provides a summary of all of venture capital activity in the United States. This includes investments into portfolio companies to capital managed by general partners to fund raising from limited partners to valuations of companies receiving venture capital investments to exits of the investments by either IPOs or mergers and acquisitions to performance of private equity funds with data from the Thomson Financial Performance Database.

The statistics for this publication were assembled primarily from the MoneyTree™ Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Financial and analyzed through the VentureXpert™ database of Thomson Financial, which has been endorsed by the NVCA as the official United States venture activity database.

About NVCA

The National Venture Capital Association (NVCA) is the premier trade association that represents the U.S. venture capital industry. It is a member-based organization, consisting of venture capital firms that manage pools of risk equity capital dedicated to be invested in high growth, entrepreneurial companies.

NVCA's mission is to foster greater understanding of the importance of venture capital to the U.S. economy, and support entrepreneurial activity and innovation. The NVCA represents the public policy interests of the venture capital community, strives to maintain high professional standards, provides reliable industry data, sponsors professional development, and facilitates interaction among its members.

Download The 2008 National Venture Capital Association Yearbook

PDF format, 3.25MB, 102Pages. Provided by NVCA.

For the National Venture Capital Association
Prepared by Thomson Financial
Copyright © 2008 Thomson Financial

What is Venture Capital?

Venture capital has enabled the United States to support its entrepreneurial talent and appetite by turning ideas and basic science into products and services that are the envy of the world. Venture capital funds and builds companies from the simplest form – perhaps just the entrepreneur and an idea expressed as a business plan –
to freestanding, mature organizations.

Risk Capital for Business

Venture capital firms are professional, institutional managers of risk capital that enables and supports the most innovative and promising companies. This money funds new ideas that could not be financed with traditional bank financing, that threaten established products and services in a corporation, and that typically require five to eight years to be launched.

Venture capital is quite unique as an institutional investor asset class. When an investment is made in a company, it is an equity investment in a company whose stock is essentially illiquid and worthless until a company matures five to eight years down the road. Follow-on investment provides additional funding as the company grows. These “rounds,” typically occurring every year or two, are also equity investment, with the shares allocated among the investors and management team based on an agreed “valuation.” But, unless a company is acquired or goes public, there is little actual value. Venture capital is a long-term investment.

More Than Money

The U.S. venture industry provides the capital to create some of the most innovative and successful companies. But venture capital is more than money. Venture capital partners become actively engaged with a company, typically taking a board seat. With a startup, daily interaction with the management team is common. This limits the number of startups in which any one fund can invest. Few entrepreneurs approaching venture capital firms for money are aware that they essentially are asking for 1/6 of a person!

Yet that active engagement is critical to the success of the fledgling company. Many one- and two-person companies have received funding but no one- or two-person company has ever gone public! Along the way, talent must be recruited and the company scaled up. Ask any venture capitalist who has had an ultra-successful investment and he or she will tell you that the company that broke through the gravity evolved from the original business plan concept with the careful input of an experienced hand.

Deal Flows — Where The Buys Are

For every 100 business plans that come to a venture capital firm for funding, usually only 10 or so get a serious look, and only one ends up being funded. The venture capital firm looks at the management team, the concept, the marketplace, fit to the fund’s objectives, the valueadded potential for the firm, and the capital needed to build a successful business. A busy venture capital professional’s most precious asset is time. These days, a business concept needs to address world markets, have superb scalability, be made successful in a reasonable timeframe, and be truly innovative. A concept that promises a 10 or 20 percent improvement on something that already exists is not likely to get a close look.

Many technologies currently under development by venture capital firms are truly disruptive technologies that do not lend themselves to being embraced by larger companies whose current products could be cannibalized by this. Also, with the increased emphasis on public company quarterly results, many larger organizations tend to reduce spending on research and development and product development when things get tight.

Many talented teams have come to the venture capital process when their projects were turned down by their companies.

Common Structure — Unique Results

While the legal and economic structures used to create a venture capital fund are similar to those used by other alternative investment asset classes, venture capital itself is unique. Typically, a venture capital firm will create a Limited Partnership with the investors as LPs and the firm itself as the General Partner. Each “fund,” or portfolio, is a separate partnership. A new fund is established when the venture capital firm obtains necessary commitments from its investors, say $100 million. The money is taken from investors as the investments are made. Typically, an initial funding of a company will cause the venture fund to reserve three or four times that first investment for follow-on financing. Over the next three to eight or so years, the venture firm works with the founding entrepreneur to grow the company. The payoff comes after the company is acquired or goes public. Although the investor has high hopes for any company getting funded, only one in six ever goes public and one in three is acquired.

Economic Alignment of all Stakeholders — An American Success Story

Venture capital is rare among asset classes in that success is truly shared. It is not driven by quick returns or transaction fees. Economic success occurs when the stock price increases above the purchase price. When a company is successful and has a strong public stock offering, or is acquired, the stock price of the company reflects its success. The entrepreneur benefits from appreciated stock and stock options. The rank and file employees throughout the organization historically also do well with their stock options. The venture capital fund and its investors split the capital gains per a preagreed formula. Many college endowments, pension funds, charities, individuals, and corporations have benefited far beyond the risk-adjusted returns of the public markets.

What’s Ahead

Much of venture capital’s success has come from the entrepreneurial spirit pervasive in the American culture, financial recognition of success, access to good science, and fair and open capital markets. It is dependent upon a good flow of science, motivated entrepreneurs, protection of intellectual property, and a skilled workforce.

The nascent deployment of venture capital in other countries is gated by a country’s or region’s cultural fit, tolerance for failure, services infrastructure that supports developing companies, intellectual property protection, efficient capital markets, and the willingness of big business to purchase from small companies.

Comments (0)

Name

Email

Comment

smaller | bigger

Add Comment