Raise a fund. Invest in hot startups. Cash out in 10 years with hefty profits (and fees) for your trouble. The model that has performed so well for venture capital over the last few years (and sometimes not so well) is stumbling.
Private equity research firm Pitchbook reports startup exits—sales or mergers of companies delivering returns to shareholders—has fallen in recent years. The number and value of startup exits were down about 70% last year from their 2014 peak. Despite big IPOs of companies such as Snap, 2017 has yet to yield a bumper crop of new exits as companies stay private longer.
That’s pushed venture capital firms to reevaluate how to cash out some, or all, of their equity holdings without waiting (and waiting) for an IPO.
It’s not a new problem, says Scott Jordon, managing director at Glynn Capital, but it’s now more acute. The time it takes for technology firms time to IPO has stretched (pdf) from around five to eight years in 2000 to about 11 years today. Pitchbook’s Nizar Tarhuni says they’re seeing venture firms extend funds or negotiate longer periods than the standard 10 years to return money to their limited partners such as pension funds. Of course, IPOS aren’t the only game in town. Plenty of companies are opting to pursue mergers and buyouts, two avenues that have remained relatively open even as IPO activity has stalled. Venture funds have also raised record sums. Last year, more than 200 venture capital funds raised $41.6 billion, a 10-year high, reports the National Venture Capital Association.
Although private investors have proved willing to pour billions into fast-growing, money-losing Silicon Valley startups such as Uber, that’s changing....MOREThat second chart is very telling.
Smart-money buyers (strategic acquirers) aren't willing to pay the valuations that VC's have ascribed to their little treasures.
As related in another context:
I'm reminded of a situation I watched back in the day.
A trader sold a position to another firm a few minutes before a trading halt. The news was negative.
The buyer D.K.'ed (Don't Know) the trade, meaning we'd still own the position, at which point the head of the firm got on the phone and told his counterpart "I don't want the shit, whyd'ya you think I sold it to you?"