There has been a lot of negativity about venture capital, venture backed exits and IPOs lately, which is not surprising in light of the high profile declines in some of the big venture backed IPOs including Facebook, Zynga, Groupon, A123, etc.
However, at Point Judith our experience has been different and based on 6 exits in our portfolios over the past four years including the successful sale of Fidelis to General Dynamics at the end of August, my intuition is that the venture liquidity market is quite robust.
So I decided to see if the numbers told the same tale of woe as the media pundits. Based on National Venture Capital Association and Thomson Reuters data along and our own internal analysis, here is what we found:
Venture backed exits in 2012 have already delivered more than $110 billion of exit value, which would be the third biggest year in the history of the industry with another four months of exits still to come. 2012 will likely only be eclipsed by 1999 and 2000.
Further, over the past four years the exit markets have generated over $230 billion of value ($190 billion if you look at the IPO values at 8/31/12 rather than on their issuance day). Although the broader sentiment is that all the venture-backed IPOs have been terrible performers and have muddied the water, the reality is that taking out the three biggest IPOs in terms of market cap in the three biggest exit value generating markets (California, Boston/New England, and the Midwest) yields post issuance performance that is quite positive.
While Facebook, A123 and Groupon were each much anticipated and substantial IPOs and their issuance market caps represented large contributions to the total venture capital exit values, their after market performance has been awful. However, if you remove just these three names from the roster, venture backed IPO exits in terms of post issuance performance is a positive 21%. In fact, that trend has even been evident during the post Facebook swoon. This substantial boost in liquidity can be seen in the continual improvements in venture capital returns that the NVCA and Cambridge Associates recently published.
Let’s first examine the stats in aggregate, followed by a closer look at the five largest regions in the US. Since 2H 2008 (includes Q3 and Q4 2008), venture-backed companies nationally have accounted for over $156 billion of IPO value at issuance, and M&A exits represent over $75 billion of disclosed value. It should also be noted that all dollar figure references to M&A deals reflect reported values only (i.e. many private deals do not have a value ascribed to them, so M&A dollar figures in reality are much higher). California, Boston / New England, New York, the DC Metro and the Midwest represented $208 billion of total exit value from 2H 2008 to 8/31/12, which is 90% of total exit value nationally. Below we dig deeper into these five markets.
Initial Issuance Compared to Current Value Shows a Substantial Delta
When looking at the regional values based on IPO’s initial issuance value, California leads the market followed by the Midwest, Boston/New England, the DC Metro and New York. However, if you look at the IPO values at 8/31/12, the order changes to California, Boston/New England, the Midwest, the DC Metro and New York. Note, only the DC Metro and New York have higher aggregate values today than on the day of issuance.
M&A Values show a different Regional Trend
When looking at the regional values based on M&A, California again leads the market followed by Boston/New England. However, the DC metro jumps into 3rd place, the Midwest comes in at 4th and New York takes 5th.
analysing the IPO Performance By Excluding Facebook, Groupon and A123
Below, we analyse the aggregate performance of the post IPO venture backed companies without Facebook, Groupon and A123. We have left in Zynga and others that have traded off, but we wanted to ascertain what the market looks like without these three mega outliers that eclipse every other venture backed IPO in their market and have led to the substantial media depression regarding the overall venture backed IPO and exit market. Further, while these issuances represented large amounts of the total venture backed market cap of companies in these regions, there are many other successful exits and post issuance IPO performances that were being buried by three extraordinary share price implosions. What we found is that overall, the post IPO performance for venture backed companies without Facebook, Groupon and A123 have been quite good.
California is in Great Shape and Post IPO Performance Trouble is Driven Primarily by Facebook
Not surprisingly, California-based companies produced the lion’s share of activity since 2008, with 60 IPOs and 752 M&A exits, representing 70% of aggregate deal value. While there has been recent debate about whether or not “Silicon Valley as we know it is Coming to an End” and it’s true that the high profile decline of Facebook’s share price from its IPO has indeed skewed aggregate post-IPO performance metrics for the region lower, exit value from the Golden State still dominates, representing 68% of the total as of 8/31/12. However, the disappointing factor is that post IPO performance, in the aggregate, is down 26% because of the scale of Facebook’s market cap, so rockets like Linkedin and Palo Alto Networks are overshadowed. However, if you remove just Facebook, California’s IPOs are up 20% in the aggregate (see graph above).
Boston and New England are Standouts
As we saw with our recent Fidelis exit (which is based in Boston), Boston/ New England continue to generate great companies and exits. New England has seen 17 IPO exits and 195 exits via M&A, representing approximately $7.7 billion and $7.2 billion respectively. As of 8/31/12 after taking into account the post IPO issuance performance the IPO value had declined slightly to $7.5 billion. In the aggregate, this is the second largest venture backed exit value creation as of 8/31/12, behind only California.
Interestingly, almost exactly half of the value of the exits in New England came from IPOs. Post-IPO performance in New England has suffered a similar head wind to California and the Midwest with a single company, A123, dragging down the broader performance. Removing A123 shows a 16% increase in the broader venture backed IPO group (see graph above). Notable IPOs include Kayak (NASDAQ: KYAK) and DemandWare (NASDAQ: DWRE) with a few notable acquisitions such as Optasite (a Point Judith investment which was acquired by SBA, NASDAQ: SBAC) and Kiva Systems, acquired by Amazon (NASDAQ: AMZN).
The Midwest is Also Cranking
Driven by Groupon’s monster $12.8 billion issuance, the Midwest has produced 9 IPOs and 42 M&A exits since 2H 2008, for totals of $17.2 billion and $3.2 billion, respectively. Unfortunately, due to Groupon’s post-IPO decline, the current value of the last 4 years of exits is down to $10.5 billion, placing it third in the US, which is still very strong.
However, removing Groupon from the picture shows that venture backed IPOs in the Midwest have increased in value post issuance by 5% (see graph above). Indianapolis is a very interesting case study with a number of successful, Internet companies coming to the market including Angie’s List (NASDAQ: ANGI) and Exact Target (NYSE: ET). A few notable acquisitions include Chicago’s Ticketsnow, acquired by Ticketmaster (now Live Nation Entertainment, NYSE: LYV) and Aprimo, another Indianapolis company, acquired by Teredata (NYSE: TDC).
New York is Emerging and IPO Performance is Rocking:
The emerging and much written about NYC market has seen fewer IPOs but M&A exits are plentiful (5 IPOs and 107 M&A deals for $1.1 billion and $2.9 billion respectively). Most notable, however, is the market’s incredibly strong post-IPO performance. All five IPOs from NYC have traded up, to the tune of a 109% gain in gross market cap (see graph below). While the IPOs of FX Alliance (NYSE: FX) and MediaMind (NASDAQ: MDMD) might not have grabbed the headlines that Facebook did, they have performed fantastically (with MediaMind actually being acquired recently at a price well above its IPO). The most notable acquisition was the huge Salesforce (NYSE: SF) purchase of Buddymedia. While Michael Kors (NASDAQ: KORS) was not venture backed, since its IPO debut it has doubled in value and is a cornerstone of the fashion leaders in NYC.
DC Metro is Still a Great Value Generator:
The DC Metro area has also quietly produced strong returns, with 57% post-IPO value creation on a smaller base of 4 IPOs. The market also has experienced 67 M&A deals, when combined with the IPOs represents total exit value $6.4 billion. Notable IPOs included Millenial Media (NYSE: MM) and Broadsoft (NASDAQ: BSFT).
Why Does this Matter?
The two reasons that post IPO issuance performance is important in the venture capital market are:
- Aftermarket performance tends to drive sentiment among the big buyers of initial issuances (ie: mutual funds, hedge funds, pension funds, etc. who buy the venture backed IPO at the initial offering). While they make investments based on fundamental analysis of the specific companies, if the broader basket of issues is trading up this increases the positive sentiment amongst these buyers and thus the investment bankers who take these companies public;
- Most venture capitalists and their limited partners actually sell their stock and generate the ultimate liquidity after the IPO following the expiration of the lock-up and/or the completion of a secondary offering which occurs at the share price 6 months or later following the original issue.
While the headlines and current public sentiment around venture-backed exits might suggest otherwise, the reality is that exits for venture-backed companies are better than they have ever been except for the dotcom bubble. However, due to post issuance declines in three of the five largest venture capital regions, there remains a taint that the broader business press has focused on.
Despite the post issuance declines in some of the well known companies, 2012 and the last four years represent a very robust and positive trend for venture capital backed liquidity. In addition to 2012 being the largest exit year since 2000, it is nearly twice the amount in 2011 and nearly three times the amount in 2010. As important, these exit levels exceed capital being committed by limited partners to the asset class in the same period by over three times.
While the issue of too much concentration of capital in too few firms remains, the fact that liquidity exceeded capital commitments by a substantial margin portends very positive returns. These dynamics further support many Venture Capitalists’ view that the industry is poised to be very successful over the next decade driven by substantially decreased funding and competition amongst VCs, extraordinary levels of innovation, a larger consumer market on Internet and mobile than ever before and apparently, robust exit markets that are the lifeblood for successful venture capital investing.
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