Sunday, May 9, 2010

Venture capitalists are licking their wounds—and their lips

VC funds invest with a longer term investment horizon and returns to their limited partners (LPs) are not possible unless they exit from their investments.  Attractive returns serve as incentives to the LPs to contribute to future funds floated by VC firms.  While India has never seen more than 20 VC exits in a year - in the first three months of 2010 alone, there have been 10 VC exits (against 3 last year) and analysts see at least 50 exits in the next six-nine months reports Mint.  Attractive exits through IPOs would help establish India as an investment destination for VC / PE funds and the trend in both US and India appear similar with many VC / PE firms waiting to exit and the market also supporting IPOs of VC / PE funded companies.  Highlighting the US scenerio, The Economist reports:
In the first quarter of the year there were almost as many IPOs of venture-backed firms as in all of 2009 (see chart). At the end of March another 43 venture-funded businesses had registered with America’s Securities & Exchange Commission to go public. Encouraging stuff, though some fret that any hiccup in equity markets could scupper these plans.

Source:  The Economist

In the US, while the tough fund-raising environment is forcing more and more VC firms to close down their activities, Steven Kaplan of the University of Chicago’s Booth School of Business and Josh Lerner of Harvard Business School in a recent paper entitled “It Ain’t Broke: The Past, Present and Future of Venture Capital”, point out that VC funds raised when capital is scarce have outperformed those put together when VC firms were flush with cash. Looking at the increase in valuation, VC firms with money to invest, worry about how to get into deals while the rest worry about exiting from the investments already made before the markets tank again.