Analysis of Venture-Backed Liquidity Events Since 2003

CMM July 2nd, 2009

The data for this analysis came from NVCA, who has a relationship with Thomson Reuters. You can find the NVCA press release here.

Basically, Q2 of 2009 showed some signs of life out of the IPO market with five offerings, four from into tech and one from non-high tech. While we’ll celebrate those as the first real high technology IPOs since Q1 2008, we can’t over do it. We’re still a long way from the IPO payday; for example, in 2007 there were 86 IPOs for the year. The IPO market imploded in January of 2008, which in hindsight was probably an early sign of the financial fiasco we’re still struggling with to this day. I still feel like lots of politicians were trying to talk us into a little recessionary dip with pre-election angst and finger pointing, but in retrospect I don’t think I paid enough attention to the stalling IPO market. But I digress…

The venture industry needs liquidity events. Right now, many funds have all capital tied up in portfolio companies that can’t exit even though they’ve reach profitability, or the fund is tied up pumping capital into companies unable to raise additional outside equity. Either way, funds are limited on their ability to engage in real value-add, early stage investing. In addition, some funds are taking huge cram-downs and dilution as portfolio companies go through recapitalization and down equity rounds (i.e. raising money at lower valuations than before). Now, I’m not waving a “poor pitiful VC” flag. I’m just saying we need a healthy, vibrant, and liquid venture industry to keep entrepreneurship going.

The thing about entrepreneurship and early-stage investing is that it’s an expertise lost to the general public and most public officials. Frankly, you don’t really hear major media reporting on innovation, new business creation, IPO registrations, and patent filings. It’s all too complicated for the average Joe or Mary, so real high-growth entrepreneurship seems reserved to those fringe elements of society. Lots of people want to claim some title in this arena (angel invstor, entrepreneur, etc), but few of them really have the somatch and even less ahve the know-how. In addition to the complexity and unknown of this space, the target is always moving as a result of disruption and hyper competition. In my experience, working in this industry requires a high level of commitment to learning and a deep humility/sensitivity to how much you need to learn and relearn each and every day.

In conclusion, we’ve seen some sign of life in the IPO market, but we’ve still got a lot of capital clogged up in venture-backed companies. Exits are approximately 60% of their high over the past five years, with IPOs still anemic.

Here are some graphs showing venture0-backed liquidity events in the US (sorry for the poor pic quality):

Venture-Backed Exits by Ys

Venture-Backed Exits by Qs

Make Mine Freedom

CMM June 29th, 2009

Kind of fitting, given what we’re dealing with today. My favorite moment is when John Q Public says “mind if I read it before signing?” What was good, common sense government 60 years ago is still good and common sense government today. All this bailout and stimulus is just smoke and mirrors that gives the common citizen less options and less opportunity. It’s the reason we haven’t seen unemployment decrease and why we haven’t seen GDP grow. Think about it when you hear discussions of “cap and trade.” Think about it when you hear discussions of nationalized health care. Think about who represents the individual the next time you vote.

Boom, Doom, & Gloom Prognostication- High Chance of Hyperinflation

CMM June 23rd, 2009

In today’s world, it has become very difficult to sift through all the information available and separate it into valuable data and drivel. Personally, I think that 95% of what we see if the latter. Economics is no exception. This dismal science has long been criticized for its reliability. After all, economists like to make forecasts based on changing only select few conditions and assuming that all others remain constant. In the end, the chaos effect typically occurs and the best designed forecasts only survive through their first encounter with reality.

On CNBC, their is a brief boom, doom, & gloom commentary on the US having a high chance of hyperinflation in the next 5 to 10 years. The premise is that large fiscal deficits and easy monetary policy leads to a sort of tipping point where inflation begins to grow exponentially overnight. In layman’s terms, if the government continues printing money and continues debt spending, the demand for the dollar internationally will decrease and the value of the dollar domestically bottoms. Traditionally, the Fed has kept inflation under control by raising and lowering the federal rate. With the federal rate already at all time lows, that instrument has been disabled. There are still some interest rate adjustments that can be done, but none are as effective as lowering the federal rate.

At this point, the economy is perilously perched on this ledge. If inflation begins to mount signs of a return, the government has little strength to keep the economy on the ledge. Underestimating the future cost of education and health care (which is driven up by very immigration and welfare friendly policy), creates a very dangerous false sense of security on inflation growth. If President Obama expects to overhaul health care and increase it as a part of government expenditure and gross domestic product, it leaves this country even more inhibited. The more mandated government spending, the less discretionary money the government has to return to the people in the form of tax breaks/incentives and the less money the govenrment has for those responsibilities really preservibed in the social contract–national defense and security. There is no such thing as a strong defense without a strong offense.

In the end, I don’t have the necessary data or training  to really derive any conclusions on how to handle inflation, but I can say that things are getting so complex that few are going to have the foresight and intellgience to really anticipate the future. I fully expect that unemployment will rise in the short-term, stocks will find a leveling point, and the value of the dollar will continue to get pounded in currency exchange.

How would you like to be Ford right now?

CMM June 16th, 2009

From David Moon on Knox News.

I’m really impressed by this editorial by David Moon on the Knox News website. First, I really agree with what it says. Second, it reallys helps articulate why government intervention in failing industries is a dangerous and bad thing.

How would you like to be Ford? Ford made difficult decisions a few years back that left them in a competitive position to say “no” to government funds and intervention. As a result, they’re being rewarded by the government “saving” the competition from failing. Its really ridiculous and contrary to most free market economic theory. Nothing is too big to fail.

The scary thing about the reckless abandon of the Obama administration is that they plan on repeating this process. They’ve already done it with banks and automobile companies. I think the health care legislation is setting the stage for a similar result in that industry. Where next?

I’m not really a doom and  gloom kind of guy.  I mean, Obama and the Democrats won pretty squarely and they deserved an honest chance. But seriously, I’m starting to think that we’ll need something like Ron Paul to get us back on track. And if you know me, you’ll know that I think he’s WAY wrong about foreign policy. I’m starting to see a place in the not-to-distant future where we’ve got a REAL economic problem– unemployment rates stays high, GDP goes stagnate or decreases, and new business creation stalls out. The players won’t have the resources or the free movement to survive, let alone succeed. Entrepreneurs won’t be able to seed opportunities or find early adopters with discretionary income. There is going to be sooooooo much to undo.

Obama Adminsitration’s Political Posturing About Unemployment

CMM June 9th, 2009

This post really strikes at two issues that frustrate me. One, the Obama economic policy of spend-spend-spend (which will ultimately be followed by tax-tax-tax). Two, the pitiful excuse for national media coverage in this country, particularly on business and economic issues.

The Obama administration is reporting that they have “saved or created”150,000 American jobs and that they are ramping up the stimulus to “save or create” an additional 600,00 jobs. The problem with this claim is that its total political drivel–you can’t measure “jobs saved.” The Department of Labor doesn’t do it, the Bureau of Labor Statistics, neither does any other legitimate organization that collects economic data. Any attempt to make that claim is bogus. Is it possible to estimate, from a theoretical perspective, the multiplier effect of stimulus spending? Yes, but not with any real accuracy or focus. It’s like a 3rd baseman trying to extrapolate how many runs  he prevented from scoring based on the number of balls he fields. Fielding a hit ball consistently makes him a solid 3rd baseman, but it doesn’t mean every ball is the equivalent of preventing a run.

We know that some jobs have been created. The government is pumping an enormous amount of money into every thing from overhauling our national laboratories, to NASA, to community organizations. In true big-government fashion, they can hire people to dig holes (which this deficit is certainly doing) and hire people to fill the hole just dug (if only the deficit was that easy to fill). But is that really having an affect?

In reality, this “saved and created” is just a bait-and-switch political maneuver. When we look at the aggregate data, we know that unemployment is at 9.4% as of May (see here). This is the highest rate since the early 1980’s and is an almost 2% increase since January (when Obama took office). You can put all the lipstick you want on a pig, but it’s still a big… and this country is still experiencing high unemployment.

Think about this the next time you vote… Hopefully we don’t find ourselves so over-leveraged with debt that we’re not in the position to finance the necessary responsibilities of government (a-hem… national security).

Hat tip to Prof Greg Mankiw at Harvard for his “Create or Save” thoughts, and to William McGurn on his “The Media Fall for Phony ‘Jobs’ Claim” at WSJ.

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