In venture capital, company founders and their investors can lose everything. But how big are the risks—and for whom?
Politicians this year are debating whether venture capitalists should pay lower taxes on their income from profitable investments because of the risks they take.
Yet data from Dow Jones VentureSource show that in about 70% of venture-backed companies, the founders lose everything. That’s because investors get their money back first.
The data is part of an analysis done by Susan Woodward, a financial economist at Sandhill Econometrics Inc., for WSJ Pro Venture Capital.
She used VentureSource to look at what’s happened to 25,700 companies, which each raised at least one round of funding between 1992 and March 31 of this year. (The money came from U.S.-based venture firms).
So far, 61.2% of the companies, or 15,737, have moved on from being stand-alone private companies—they’ve either gone public, were shut down or got acquired.
Twenty four years is a long time in venture capital, but despite the booms, busts and regulatory changes that have occurred over those years, Ms. Woodward found that certain patterns hold.
— Companies are most likely to get acquired or shut down after one round of funding, and those outcomes are nearly equal—14% of companies were shut down after one funding round and 15% were acquired. Between rounds 2 and 9, the chances of getting acquired are higher, although the likelihood of either outcome goes down with each round.
— Despite the number of highly valued private companies that have raised hundreds of millions in funding, companies are most likely to go public after four funding rounds. By round five, “companies are mostly done with whatever they’re going to do,” Ms. Woodward says.
— Getting acquired isn’t necessarily a good outcome. If the value of a deal isn’t announced—and about half aren’t—the deal is more likely to have some undesirable aspect, such as the company having to raise a bridge round just before it is sold. “We know that the harder we work to find an acquisition value, the lower it is,” she says.
— In about 45% of companies, investors lose everything.
— The 10-times-the-money returns that venture capitalists say they strive for are rare. For all the companies that exited since 1992 (the 61.2% from above), the aggregate value at exit was $1.2 trillion. But venture capitalists in those companies invested $420 billion. That’s an aggregate return of 2.9 times.
I’ll be looking more closely at this data in future posts. Meanwhile, I’d love to hear your comments.
Write to Deborah Gage at Deborah.Gage@dowjones.com