While in San Francisco last week, I had dinner with a group that included some National Venture Capital Association staffers. As we were saying our goodbyes, I said something like:
“I’ve heard that the vast majority of VC funds have been in the red for nearly a decade. Is it true? If so, can the industry even survive, besides a few successful outliers?”
Stone faces, no responses. In the car-ride back to Redwood City, my boss couldn’t quite decide if he was bemused or horrified. But he was certainly curious to know if it was true.
Which brings us to yesterday, when the NVCA and Thomson Financial released their latest set of VC performance data (get it here). The lead sounded good: “Venture capital performance continued to show positive returns across most investment horizons ending March 31, 2007.” And a corresponding chart puts average five-year returns for all VC at 2.7%, with far stronger performance for one-year (18.1%), three-year (9.6%), 10-year (21%) and 20-year (16.4%). Only the five-year underperformed the Nasdaq or S&P 500, and that can be chalked up to venture getting hit particularly hard by the Internet bubble burst.
Go back now, and see if you can find the operative word in that last paragraph. Find it? That’s right, it’s average – and the averages are being artificially inflated by outstanding performance in the top two deciles. A look at the medians reveal a much sorrier state of affairs.
I went into the Thomson database, with a specific interest in funds raised post-bubble. Most LPs have discounted everything that happened before then anyway, so it seemed appropriate. And, just to be safe, I ran separate data sets for vintage years beginning in 2001 and 2003.
Through the end of Q1 07, funds raised between 2001 and 2007 have a median IRR of -2.6 percent. Moreover, the supper quartile benchmark was at just 4.1%, which means that the vast majority of VC funds raised since 2001 have underperformed a typical savings account.
The data beginning in vintage year 2003 is even worse (which is probably to be expected with the J-curve). The median for these funds is -5.7%, with the upper quartile benchmark at -0.2 percent. That’s right, more than 75% of VC funds raised since 2003 were underwater through the end of Q3.
Want some anecdotal evidence? How many times during the carried interest debate have you heard a VC say: “We haven’t seen carry yet this decade.” In fact, it’s become a perverse rallying cry.
This is simply unsustainable, and the endgame scenarios are troubling. VCs were paying relatively low valuations for companies between 2003 and 2005 (or at least should have been), and the IPO and M&A windows have been steadily improving. If most funds are losing money in that environment, then what happens when some of today’s inflated valuations – particularly in clean-tech and later-stage deals – come home to roost?
My after-dinner questioning of market “survival” after dinner might have been a bit exaggerated but, unless something changes soon, the market could be much smaller in just a few short years. There is a lot of laissez-faire attitude in the LP community, but even the dumbest of dumb money can tell the difference between black and red.
Candover is still struggling to acquire Stork, a Dutch maker of food processing equipment. The firm had agreed to acquire Stork for €1.5 billion, or €47 per share, earlier this year, but needed to receive 80% shareholder approval. Standing in its way has been Marel HF, which holds a 25% stake in Stork and has said the Candover bid is too low. The two sides had been in negotiations, but they have now broken down. Marel is now considering upping its stake, while Candover says it is committed to its offer and may try lowering the acceptance threshold. ABN Amro is advising Stork on the deal, while Candover is being advised by Goldman Sachs.
Accelerator Corp., a Seattle-based business incubator, has raised $22.5 million in third-round funding. WRF Capital was joined by return backers Amgen Ventures, ARCH Venture Partners, OVP Venture Partners and Alexandria Real Estate Equities. Since its 2003 inception, Accelerator has helped incubate six early-stage companies. Two of them – VLST Corp. and Spaltudaq Corp. — have “graduated,” and raised a combined $84 million in follow-on financing. www.acceleratorcorp.com
WiChorus Inc., a San Jose, Calif.-based developer of mobile services and applications, has raised $15 million in Series B-1 funding, according to a regulatory filing. Mayfield Fund led the deal, and was joined by return backers Accel Partners and Redpoint Ventures. WiChorus had raised an $8.5 million Series B round in June 2006. www.wichorus.com
Anobit Technologies Ltd., a Herzelia, Israel-based fabless semiconductor startup focused on the NAND flash memory market, has raised $17 million in Series A funding. Battery Ventures and Pitango Venture Capital co-led the deal, with Battery’s Scott Tobin and Pitango’s Rami Beracha joining the Anobit board of directors. www.anobit.com
MailExpress Inc., an Atlanta-based provider of mail processing solutions, has raised $15 million in Series B funding. XAnge Capital led the deal, and was joined by return backers CMEA Ventures and Logispring. www.mailexpressinc.com
Aristos Logic Corp., a Foothill Ranch, Calif.-based provider of RAID storage processing solutions, has raised $13.36 million in Series G funding, according to a regulatory filing. Return backers included JPMorgan Partners, TPG Ventures, Woodside Fund, QTV Capital, Seagate Technology, Infineon Technologies, Emulex Corp., EMC Corp. Aristos Logic has raised around $100 million in total VC funding since its 2000 inception. www.aristoslogic.com
Virident Systems Inc., a Los Altos, Calif.-based computer hardware startup, has closed its Series A round with $13.3 million. PE Week Wire first reported on the deal back in April. Artiman Ventures led the deal, and was joined by Spansion LLC, individual angels and members of company management. www.virident.com
Celator Pharmaceuticals Inc., an oncopharmaceutical company with offices in Vancouver and Princeton, N.J., has raised US$10 million in Series C funding. Return backers include Domain Associates, Quaker BioVentures, TL Ventures, Ventures West Management, GrowthWorks, the Business Development Bank of Canada and Healthstone Investment Ltd. Celator has now raised $57 million in total VC funding since 2003. www.celatorpharma.com
Compete Inc., a Boston-based provider of online analytics, has raised $10 million in “Series III” funding. Return backers include Charles River Ventures, idealab, Split Rock Partners and William Blair Capital Partners. Compete has raised $43 million in total VC funding since 2000. www.compete.com
Hoodiny Entertainment Group, a digital content production company focused on the Latino market, has raised $9 million in Series B funding. No investor information was disclosed by the company, which previously had raised a $2 million Series A round. Hoodiny has offices in Madrid, Spain and Miami, Florida. www.hoodiny.com
Isto Technologies Inc., a St. Louis-based orthobiologics company, has raised $8.8 million in Series E funding, according to VentureWire. Ascension Health Ventures led the deal, and was joined by return backers Alafi Capital, Life Sciences Partners, Mid-America Transplant Services and individual angels. Isto has raised nearly $26 million in total VC funding since 2000. www.istotech.com
60Frames Entertainment Inc., a Beverly Hills, Calif.-based digital content studio focused on professionally-made short films, developed to help bring professionally made short-form films to the web, has raised $3.5 million in Series A funding led by Tudor Investment Corp., according to a regulatory filing. http://60frames.com
Ifbyphone, a Cambridge, Mass.-based provider of voice infrastructure and applications to SMBs, has raised $2.75 million in Series A funding. Origin Ventures and Apex Venture Partners co-led the deal, and were joined by company founder and CEO Irv Shapiro. The round is expected to close with a total of $3 million by year-end. www.ifbyphone.com
3i Group has bought a 45% stake in OT Companies, a provider of oil tank storage services in Singapore, Amsterdam and Malta, for €305 million. The transaction included €115 million in equity from 3i’s listed Infrastructure fund, and a €190 million debt facility arranged by RBC Capital Markets. The deal is expected to close at the end of August. www.3i.com
Apollo Management has completed its $2 billion take-private buyout of EGL Inc., a Houston, Texas-based logistics provider. EGL stockholders received $47.50 per share. www.eaglegl.com
ArcLight Capital has agreed to acquire interests in 18 geothermal, wind and solar renewable power generation projects from Caithness Energy LLC. The projects have an installed capacity of 824 megawatts. No financial terms were disclosed. www.arclightcapital.com www.caithnessenergy.com
KKR is considering a buyout offer for the hard-disk drive business of Singapore-based Beyonics Technology Ltd., according to Dow Jones. Such a deal could be valued at nearly $200 million. www.kkr.com
KPAC Solutions has acquired the automotive operations of Morton Grove, Ill.-based John Crane Inc., for an undisclosed amount. The unit makes mechanical water pump seals for use in engine cooling systems, and includes an Illinois testing facility, Texas-based distribution operation and manufacturing plants in China, France and Mexico. www.kpacsolutions.com www.cyclam.us
Resilience Capital Partners of Cleveland has acquired Penda Corp., a Portage, Wis.-based manufacturer of original equipment and aftermarket drop-in bedliners and tonneau covers. No financial terms were disclosed. www.rcpmb.com www.pendacorp.com
Merrill Lynch Global Private Equity and radio broadcaster Cumulus Media Inc. (NASDAQ: CMLS) have been hit with a class action suit, related to Merrill’s proposed $1.3 billion buyout of Cumulus. The suit alleges that the deal – which includes buy-side participation by Cumulus CEO Lewis Dickey — breaches the defendants’ fiduciary duties to Cumulus shareholders. www.cumulus.com
Wolseley Private Equity of Australia has agreed to acquire Cartridge World, an Emeryville, Calif.–based cartridge refill and manufacturing franchisor. No financial terms were disclosed. Wolseley will buy an 80% stake from company co-founders Bryan Stokes and Paul Wheeler, with current company management also participating. www.cartridgeworldusa.com
Sucampo Pharmaceuticals Inc., a Bethesda, Md.-based drug company working with a class of compounds known as prostones, raised $43.13 million through its IPO. The company priced 3.75 million Class A common shares at $11.50 per share ($14-$16 range). It will trade on the Nasdaq under ticker symbol SCMP, whileCowen & Co.served as co-lead underwriters. Shareholders include Fujisawa Pharmaceutical Co. Ltd., Orix Corp., Mitsubishi UFJ Capital Co., Tokyo Marine and Nichido Fire Insurance Co., Mizuho Capital and Astellas Pharma Inc. www.sucampo.com
Virtusa Corp., a Westborough, Mass.-based provider of IT consulting, technology implementation and application outsourcing, raised $61.6 million through its IPO. It priced 4.4 million common shares at $14 per share ($14-$16 range), for an initial market cap of approximately $320 million. Virtusa will trade on the Nasdaq under ticker symbol VRTU, while JPMorgan servedas lead underwriter. The company had raised around $72 million in total VC funding since 2000, from firms like Sigma Partners (24.6% pre-IPO position), Charles River Ventures (16.2%) and Globespan Capital Partners (15.6%). www.virtusa.com
Concho Resources Inc., a Midland, Texas-based oil and gas company focused on the Permian Basin of Southeast New Mexico, raised $240.24 million via its IPO. The company priced 20.89 million common shares at $11.50 per share ($14-$16 range), for an initial market cap of $833.75 million. It will trade on the NYSE under ticker symbol CXO, while JPMorgan and Banc of America Securities served as co-lead underwriters. Shareholders include Yorktown Energy Partners.
Synacor Inc., a Buffalo, N.Y.-based provider of online content and technology solutions for broadband and Internet service providers, has filed for an $86.25 million IPO. It plans to trade on the Nasdaq under ticker symbol SYNC, with Deutsche Bank and Bear Stearns serving as co-led underwriters. Synacor has raised around $54 million in VC funding since 1999, including a $17 million Series C round last year at a post-money valuation of around $100 million. Shareholders include North Atlantic Capital, Mitsui & Co. and return backers Crystal Ventures, Advantage Capital Partners, Walden International, Intel Capital and Rand Capital. www.synacor.com
CCS Medical Holdings Inc. (a.ka. Chronic Care Solutions), a Clearwater, Fla.-based medical supply management company, set its IPO terms to 10 million common shares being offered at between $14 and $16 per share. It would have an initial market cap of around $607 million, if it were to price at the high end of its range. CCS plans to trade on the Nasdaq under ticker symbol CCSM, with Lehman Brothers and Goldman Sachs serving as co-lead underwriters. Warburg Pincus acquired the company in 2005. www.ccsmed.com
AIG Capital Partners has sold Bulgarian consumer finance business JetFinance International to Cetelem, the consumer arm of BNP Paribas. No financial terms were disclosed, except that JetFinance had total assets of €109 million. AIG was advised on the sale by Citigroup Global Markets. www.aig.com www.jetfinanceintl.com
BC Partners has agreed to sell Swiss hospital business Hirslanden to Medi-Clinic of South Africa, for approximately $2.36 billion.
CBS Corp. (NYSE: CBS)paid $43 million toacquire MaxPreps earlier thisyear,according toits Q210-Q filing. MaxPreps is a Cameron Park, Calif.–based provider of high school sports information and media services. It had raised around $12 million in VC funding from firms like Dolphin Equity Partners, BEV Capital and DFJ Frontier. www.cbs.com www.maxpreps.com
Fidelity National Financial Inc. (NYSE: FNF) has acquired Property Insight from Fidelity National Information Services Inc. (NYSE: FIS) for $95 million. Property Insight manages
maintains and updates title plants that are owned by FNF, and manages title plant construction activities for FNF. FIS minority shareholders include TPG and Thomas H. Lee Partners. www.fidelityinfoservices.com
IBM has agreed to acquire Princeton Softech Inc. from Apax Partners and LLR Partners for an undisclosed amount. Princeton Softech is a Princeton, N.J.-based developer of data management software. www.ibm.com www.princetonsoftech.com
Comm-Works Holdings LLC, a Minneapolis-based provider of enterprise communications solutions, has acquired Harbor Technologies, a Mt. Laurel, N.J.-based enterprise networking company. No financial terms were disclosed. Comm-Works is a portfolio company of Morgenthaler Partners. www.comm-works.com www.harbortech.com
GoAmerica Inc. (Nasdaq: GOAM) has agreed to acquire the Telecommunications Relay Services (TRS) division of Verizon for $50 million in cash. The deal also includes up to $8 million in cash earn-outs, and is being financed via a $65 million private equity and debt infusion from Clearlake Capital Group. www.goamerica.com www.verizon.com
Network Communications Inc., a Lawrenceville, Ga.-based print and online publisher of real estate information, has acquired By Design Publishing, a provider of personal marketing solutions for real estate agents. No financial terms were disclosed. Network Communications was acquired by in January 2005 by Citigroup Venture Capital Equity Partners. www.livingchoices.com
SunSource Holdings Inc., a fluid products and systems distributor owned by Code Hennessy & Simmons, has expanded via the acquisition of Seattle-based George W. Warden Co. Inc. (a.k.a. Warden Fluid Dynamics). No financial terms were disclosed. www.sun-source.com www.wfdonline.com
Tharco Containers Inc., a packaging portfolio company of Tricor Pacific Capital, has acquired Design Packaging Inc., a Lithonia, Ga.-based independent sheet plant. In conjunction with the deal, Tharco completed a recapitalization that included a $145 million senior secured credit facility led by GE Antares Capital and GE Capital Markets. Subordinated financing was provided by S.A.C. Capital Advisors. www.tharco.com
Ziff Davis Enterprise, a media and demand generation company for the tech industry, has acquired Development Shed, a network of 12 complementary content websites targeting development and programming professionals. No financial terms were disclosed. Insight Venture Partners recently carved Ziff Davis Enterprise out of Ziff Davis Media for $150 million. www.ziffdavisenterprise.com www.developmentshed.com
Firms & Funds
I2 Capital, an Italian special situations firm, has closed its first institutional fund with €200 million in capital commitments. Acanthus Advisors served as placement agent. I2 is a part of Intek SpA, which is publicly-traded in Milan. www.i2capital.it
Partners HealthCare has formed a $35 million venture capital fund, according to The Boston Globe. Partners is the nonprofit parent company of Harvard-affiliated hospitals like Massachusetts General Hospital, McLean Hospital and Brigham & Women’s Hospital, and reportedly will use the fund to help spin out promising research. www.partners.org
Anand Daniel has joined IDG Ventures Boston as a senior associate. He recently received his MBA from MIT Sloan, before which he spent several years in engineering and project management positions at Intel Corp. www.idgvb.com
Generation Partners has promoted Andrew Hertzmark to partner. He joined the firm in 2004 to focus on healthcare services, before which he was with Galen Associates. www.generation.com
ING has named Martijn Bruins as head of leveraged finance and sponsor coverage for Central and Eastern Europe, according to Dow Jones. He previously was a managing director of debt capital markets for ING. www.ing.com
Probitas Partners has promoted San Francisco-based Jeff Mills to principal and New York-based Stephen Salyer to vice president. www.probitaspartners.com