Risk/Return: For VCs, a Taste of the Glory Days

Risk/Return: For VCs, a Taste of the Glory Days


Venture capital firms should be feeling festive. Not only did the Groupon initial public offering finally get off the ground but several other IPOs earlier this year are still doing well. Teavana (TEA) is trading well above its $17 IPO price, as is Linkedin (LNKD) – even if the latter, after announcing plans for a follow-on stock sale last week, now languishes below the levels hit in the exuberant aftermath of its debut as a public company.

Numbers like that helped the venture capital industry post some impressively upbeat returns for the second quarter of 2011: with major market indexes ranging from flat to up 1.4% in Q2, venture funds returned 7% to their limited partners, according to the Cambridge Associates’ U.S. Venture Capital Index. (That index is calculated based on data from more than 1,300 different VC partnerships.) Even better news was that venture partnerships distributed more capital to their limited partners – the institutional investors who put money into their funds – than they requested from those pension funds and endowments in order to make new investments.

But there’s more. While the second-quarter gains were large enough to push the venture industry's 10-year track record back into the black for the first time in more than two years, the National Venture Capital Association warns that it will require a robust IPO market for that trend to remain intact. There are certainly a lot of other companies eager to follow Groupon (GRPN) and Linkedin onto the public stage; Dealogic reported that no fewer than 31 other technology companies hope to go public in the next six months, raising some $4.5 billion.

In all, there are more than 200 companies that have been sitting on the sidelines as the market has gyrated for most of the autumn. At least October and November have been slightly better than September, when no IPOs at all were completed for the first time since the height of the financial crisis. That drought almost certainly means that venture investors will have to brace themselves for third-quarter and fourth-quarter results that are far less appealing than those reported in the first half. A few IPO “pops,” like the dramatic first-day gains seen by stocks of Groupon and Linkedin aren’t going to mark a return to the glory days of venture investing for the VC industry as a whole, and limited partners will have to reconcile themselves to more moderate returns.