Bubble Fund Exits Improving, Says Secondary Buyer

A decade ago, anyone with a bank account was investing in a venture capital fund. By now, a lot more bubble-era fund stakes have found their way to secondary investors.

Hans Swilden, founder of venture capital secondary investor Industry Ventures, estimates that today about half of his firm’s venture capital stakes are for funds closed in 1999 and 2000.  This year he expects to invest in another 20 – and is likely to add even more the following year.

Currently, Swilden says there are six companies in which Industry Ventures has stakes that are in registration for IPOs, including some founded during the dot-com boom. The firm also made money last week with the IPO of QuinStreet, a provider of online marketing services that first raised venture funding in 1999.

Though most funds are conceived with a ten-year lifespan, it’s most common for bubble-era funds to opt to extend operations for a year or two after hitting the decade mark, Swilden says.  That said, there are also plenty of partners who are opting to terminate the fund and sell the portfolio.

What’s the appeal for investors in a ten-year-old portfolio? Swilden says he sees a lot of value in many older funds, as many contain portfolio companies that only began reaching scale in recent years. Swilden says he’s optimistic about the exit environment for many of these older companies that are still private.

“It took them ten years to get to scale, and the IPO market right now requires scale,” he says. Common wisdom is that technology company today needs at least $100 million in revenue to go public, and the minimum valuation bankers are looking for is $300 million to $400 million.

But prices for secondary assets – including bubble fund stakes – have gone up from last year, Swilden says. Whereas in the first quarter of 2009, venture assets were selling on the secondary market for discounts of 60% to 70% off net asset values, leading many would-be sellers to hold off,  that’s no longer the case. Today, discounts are more in the range of 20% to 40% off net asset values, Swilden says.