It's a well-known truism that only a few investments in any given venture fund end up producing some returns for its investors. A lesser-known converse is just how few VC vehicles end up bolstering overall performance for the entire asset class. The median venture capital internal rate of return (IRR) for the top decile of funds in the 2010 vintage exceeds 35%, with funds from the 2013 vintage seeing that figure soar to just about 40%.
Looking at the amount of value left in similarly youthful vintages, the median remaining value to paid-in (RVPI) multiple—the amount of money that could be realized that is left in a fund—for 2010 vintages stands at 1.07x, so over the total value of the median VC fund from that time. The same figure gets even more drastic for more recent vintages, understandably, with 2011 vintages seeing 1.22x for an RVPI multiple.
Many funds from these years hold investments in companies that benefited significantly from the ramp-up in median valuations over the past several years, with the most notable examples being, of course, unicorns—companies valued at $1 billion or more via venture financings. A matter of growing interest is the corresponding decline in the volume of venture-backed exits, with the number of sales to strategic acquirers and initial public offerings (IPOs) decreasing in frequency. This necessarily has postponed liquidity that could potentially have been occurring already, although the case of unicorns is more complicated since they are so highly valued it reduces the number of potential buyers and increases the probability of an IPO.
The M&A boom that drove aggregate deal value quite high over the past few years could be entering its final stages, but the IPO window appears to be opening somewhat given public markets’ strong performance and market sentiment. Consequently, should a group of unicorns go public in 2017, they could potentially convert much of that residual value to realized cash paid back to investors in venture funds, as well as to the venture investors themselves.