Venture Capitalists invested $25.5 Billion in 3,416 companies in 2006. Angel investors invested about $26B in 50,000 companies. With $52 Billion invested in start-ups in 2006, there were only about $22B in "exits". Acquisitions accounted for $16.6B while IPOs brought in $5.3B.
VCs and Angels expect to wait an average of 5 years before they get their money back in the form of an IPO or acquisition. In 2001 VCs invested $32.1B in 2,780 companies, while Angels invested $30B, for a total of $62B invested in 2001. Wow! 2001 was a bad vintage year...returning perhaps $22B on $62B invested.
No Return On Investment - Investors hope to get a return on their investment in addition to the return of their investment. No matter how you look at it VCs and Angels are not doing very well. For every Sequoia investment in Google there are a hundred investments that are losers. It is very difficult at the macro level to match investments with returns but if we assume the $62 Billion invested in 2001 roughly matched to the $22 Billion in exits in 2006...there is a big problem in the industry.
VCs are like mutual funds - The top quartile of VCs and mutual funds make most of the money. The rest under perform...sometimes badly. Mutual funds use the S&P 500 index as a benchmark...and the vast majority of them can't beat the unmanaged index. VCs don't have a similar benchmark but the performance results are about the same. The top 20% of VC firms make most of the money while more than half lose money.
Angel investors have invested about the same amount as VCs the last 3 years and will probably exceed VCs in 2006. The numbers on Angel investing for 2006 should be released by the Center for Venture Research in the next 30 days. Angels invest smaller amounts in many more companies than VCs. The VCs are making increasingly larger investments in fewer deals. Angels are filling the capital gap.
M&A is the most likely exit strategy. The days of blockbuster IPOs have faded from memory. Acquisitions have been the most likely exit for the past 6 years. Take a look at these investment and exit numbers (all numbers in Billions US Dollars);
Exits have averaged $18B over the past 6 years while investments have averaged about $40B over the same time period. This can't go on forever. Or, maybe it can. Gamblers lose billions of dollars every year in Las Vegas...and have been happy to do so for over 50 years. VCs and Angels are big time gamblers and they love the game. One winner erases all the losers in their mind. I completely understand that because I think the same way.
Who is doing the acquisitions? - I only focus on the tech sector, specifically software, so here are the numbers for 2006.
Microsoft acquired as many companies as Google and Yahoo combined. Microsoft acquired 19 companies last year. Google acquired 10 and Yahoo acquired 9. IBM also acquired 9 companies. Of course Google spent more on acquisitions, spending $1.65 Billion on YouTube alone. Visit the links above for a complete list of the start-ups acquired by each company.
I love start-ups and the venture capital world. High risk and high rewards. That is the way I like to live. I remember my father-in-law telling me about the virtues of a balanced investment portfolio. I told him that my portfolio is balanced. I have risky investments balanced by outrageously risky investments. VCs and Angels feel the same way...and thank god they do.