Brains or a Bull Market? It’s a Good Time to Be a
Venture Capitalist
The number of venture capitalists
investing in billion dollar exits is increasing. By a lot.
Has the surge of billion dollar+
tech exits, growing private company valuations and a booming venture capital financing market
actually been a good thing for venture capitalists?
At the end of 2013, we analyzed
billion dollar tech exits and the ability of VCs to get into those big exits
consistently and early, and the results were not pretty. So unpretty, in fact,
that we declared that most VCs
are not great predictors of technology success (VCs loved that
btw) We found that only 3.5% of active VCs had actually invested in 2 or
more billion dollar exits over the 10 year period we’d studied (2004 to 2013).
A single billion dollar exit was luck. Two or more was where an investor
could be considered having skill.
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At the time, we wrote:
While
venture capitalists talk about wanting to identify and invest in billion dollar
companies, the reality is that few VC investors actually do. Even when they do,
very few are able to do it again … Moreover, for those who were astute enough
to get into these big exits, getting in early is even rarer, highlighting the
paucity of firms who can truly see around corners and who have access to truly
superior dealflow.
What a year a difference makes. With
the vibrancy of the market in 2014, things are most definitely looking up for
venture capitalists.
We compared the ten year period from
2004-2013 versus 2005-2014, and there is some good news:
- More
VCs had billion dollar exits – From 2005 – 2014, 161
VCs had at least one $1B+ exit in their portfolio, while from 2004 – 2013
only 104 VCs managed to get a Unicorn exit.
- The
number of VCs with multiple billion dollar exits also grew – The number of VCs with
two or more $1B+ exits nearly doubled. There were 38 (or 3.4% of all
active US tech VCs) from 2004 – 2013 while 2014 saw 68 (5.9% of active
VCs) score multiple billion dollar exits from 2005 – 2014.
- A
higher % of $1B+ exits are being sourced early. From
2005 – 2014, of the VCs with two or more $1B+ exits, 24% of their exits
were sourced at the Series A stage or prior. This figure was up versus
2004 – 2013 when 20% of multi-Unicorn VCs’ investments were made at Series
A stage or prior.
Summary: It looks to be a good time
to be a venture capitalist. Of course, the old adage that “one should not
confuse brains with a bull market” is worth restating.
We dig into the data below in more
detail.
More
super-sized billion dollar exits
As the graphic below highlights,
there has been an acceleration in the pace and number of billion dollar
VC-backed exits. Billion dollar valuations to private companies have followed
suit in 2014 with 38 private companies joining the billion dollar club in 2014.
The chart below plots the exits (sans Facebook’s $104B IPO) by year and
valuation. The dramatic increase in Unicorns is evident by the growing cluster
that starts in 2012. Starting in November 2011 with Groupon’s IPO, we also see
the increase in VC-backed US tech exits over $10 billion.
More Lucky VCs
AND more Skilled VCs, too
As mentioned above, 161 VCs invested
in the billion dollar tech exits from 2005-2014. 58% of them (93 of the 161)
invested in only a single billion dollar exit. These are the “lucky VCs” since
we’ll reserve the “skilled VC” tag for those in 2 or more. On a sheer numbers
basis, the number of VCs who invested in a billion dollar exit climbed
significantly, as the image below illustrates. Our prior analysis which
covered 2004-2013 shows only 68 VCs who had a billion dollar exit highlighting
the 37% growth in the absolute number of lucky VCs (those with only 1 billion
dollar exit).
The first bubble represents the 93
VCs who only invested in one billion-dollar company, which equals ~8.2% of all active VCs in US Tech. The next bubble, which
represents VCs that had exactly two billion-dollar company exits, shows that
the number of VCs who can invest in multiple unicorns are rarer, dropping
sharply to 29 or 2.6% of all active tech VCs in the US.
As we move further to the right, we
enter increasingly rarefied VC air. The far end of the spectrum is comprised of
6 VCs who each participated in 8+ billion-dollar exits, including Sequoia
Capital, New Enterprise Associates, Kleiner Perkins Caufield & Byers, Accel
Partners, Benchmark, and Greylock Partners. These six elite VCs represent just
0.53% of all active US Tech VCs.
The skilled VCs (those with 2 or
more billion dollar exits) are increasing.
Of the 161 total VCs with a $1B+
exit, 68 have been investors in two or more Unicorns since 2005, up from just
35 between 2004 – 2013. The 2014 “skilled VC” figure is equal to 5.9% of all active VCs investing in US-based tech companies
Are these
really the skilled VCs?
Being part of large exits is not
enough of a test of a VC’s effectiveness. There is a lot of logo chasing
occurring in VC today and so an investor who has jumped into later-stage
companies (Series C or later) is not as skilled as an investor who got in
early.
In other words, large late-stage
exits do not necessarily correlate with the investment’s returns, as often the
largest returns from an exit go to the earliest investors.
To that effect, and to better assess
a VC’s investment selection proficiency, it is important to look at what stage
they made their first investment in a company.
The chart above breaks down the
investors based on the stage they invested in each of the $1B+ companies. For
example, if we look at the six investors with 8+ $1B+ exits, we find that 60%
of their investments were in a Series B or prior round.
On the other end of the spectrum,
when looking at the 93 VCs with just one $1B+ exit since 2005, 47 (or 51%) were
at or before the Series B stage. This number is up considerably from last
year’s analysis which saw just 38% of the 68 VCs with one $1B+ exit get in at
Series B or earlier. Said another way, nearly half of the VCs who had
just a single billion dollar exit over the period from 2005-2014 were not able
to get in prior to the Series B financing.
How many VCs
actually see around corners?
When looking who invests at the
Series A stage or earlier, we start to identify the truly great VCs. The elite
“stock pickers” who have the best networks, the proprietary dealflow, the
heightened sense of pattern matching.
As you can see below, across the
entire spectrum, the number of VCs who consistently get in early to these deals
is quite low. If you are an LP or entrepreneur, these are the truly elite and
skilled VCs.
All of the underlying exit and
investor data used in this research brief is on the CB Insights Private Company Exit Database. Sign up
for free below and learn more about our VC predictive models, Investor
Mosaic.
Methodology / Notes
For companies that exited via
M&A, the valuation is the real or rumored valuation at date of exit
announcement. For companies that IPO’d, the exit valuation was calculated using
the closing stock prices on the day of the IPO.
The data comprised of exits that
occurred between January 1, 2004, and on or before December 31, 2014.
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