The venture capital industry shakeout has been far worse than previously reported, according to a dead-on analysis by OVP Venture Partners.
A surface view of NVCA data seems to show just a 15% drop in venture capital firms between its 2001 peak (946) and 2006 (798). But OVP goes further – arguing that the drop is actually closer to 50 percent. How? By redefining the parameters.
Specifically, OVP argues that a VC firm’s continued existence is irrelevant if it is inactive. For example (mine, not theirs), Mobius Venture Capital is still technically alive – but only for the purpose of managing its existing portfolio. Most of the partners have since moved on, and there will never again be a new Mobius portfolio company. So OVP would remove them from the “active” list, along with any other firm that has not made a new investment in the past year.
Using this metric, OVP discovers that the VC industry peak was in 2001, when 1,156 different firms added at least one new portfolio company. The 2006 figure stands at just 587, for a 49.22% decrease.
OVP doesn’t delve into the reasons for this shakeout, but one only need look at the returns. As I reported a few months back, the average VC fund raised between 2001 and Q1 2007 have a median IRR of -2.6 percent. And it’s even worse for funds raised since 2003, where it comes in at -5.7%, with the upper quartile benchmark at -0.2 percent. In other words, more than 75% of VC funds raised since 2003 are underwater.
The industry is becoming unsustainable, and it shows.