Payday for VCs plummets 65 percent in 1st quarter

Liquidity generated for venture capitalists from the sales or IPOs of their portfolio companies falls sharply--to lows not seen since 2003--according to a report.

Tech Industry

With venture-backed companies failing to launch IPOs and with mergers and acquisitions lagging, liquidity for venture capitalists fell 65 percent in the first quarter, according to a report released Wednesday by Dow Jones VentureSource.

During the first quarter, $3.2 billion in liquidity was generated--a sharp contrast with $9.1 billion from a year ago and around the level seen in 2003. Because no initial public offerings took place in the first quarter, all of the $3.2 billion was generated from venture-backed companies selling themselves to the highest bidder.

Those two types of transactions are how VCs and investors in VC funds make their money back, after nursing those companies along with funding. The fewer of those types of transactions, the less money that VCs and their investors make.

Jessica Canning, VentureSource's global research director, said in a statement:

The most disturbing part about these new liquidity figures is that we've already reached the lows seen after the dot-com bust and we may not be at the bottom yet.

The IPO market is totally closed and there's just no clear indication right now that it will revive any time in the next quarter or two, even with 43 companies currently in (IPO) registration. It's a tough time to be a venture capitalist - and likely even tougher to be an investor in a venture fund.

With no venture-backed companies launching IPOs in the first quarter, all the activity fell to mergers and acquisitions. During the quarter, 68 mergers and acquisitions took place, substantially down from the 104 completed a year ago.

"This is due to the fact that many public technology companies are focused on conserving capital and the few that are buying venture-backed companies are doing so for lower prices," Canning said of the plunge.

The median price paid for a venture-backed company was $22.1 million in the first quarter, compared with $60 million a year ago, according to VentureSource. That's a steep 63 percent decline.

While the amount of money companies raise through a sale or IPO is down, venture capitalists may find comfort in that the time it takes for their portfolio companies to provide liquidity is shrinking.

In the first quarter, the median amount of time it took for portfolio companies to provide money back to their VCs was 4.7 years, compared with 6.8 years as was the case a year ago, according to VentureSource.

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