Is Venture Broken? - No

I’m a bit late to the part of reactions to the Sevin Rosen announcement that it was ending after its 10th fund and the related New York Times Article.  I felt compelled to post after reading a series of posts and comments on Fred Wilson’s blog.  I have seen no commentary that acknowledges the underlying math and attempts to take a constructive look ahead.

First, the math is simple.  The vast majority of returns to limited partners of venture firms have come from the value created after IPO.  Some funds have made money through M&A, but YouTube is the exception, not the rule.  However, M&A is not enough to drive aggregate returns to levels much above public market returns. 

Let's not delude ourselves. If you invest $20-40 million and take 5 years to build company from nothing to $20-30 million in revenues and profitability, selling out for even $150 million does not seem to justify the effort and risk.  Buyers typically bury fail to grow acquired technologies.  The goal of venture exercise is to create new, large companies. 

Looking at the long history of venture, the vast majority of growth in revenues and value occurs after IPO, with the IPO validating new markets and/or competitive position against incumbents. Given IPO hurdles, one could argue that the venture market will remain "broken" until there is a more receptive IPO market.  Fortunately, there are signs that the IPO market is returning to accept companies with revenues under $50 million.  Recent deals like Riverbed and Acme Packet have demonstrated strong after-market stock performance.  Failure of bubble IPOs created a fear of investing that has lasted many years.  If investors see a few deals working, the mood could turn from fear back into greed, with a reasonable number of technology IPOs introduced each year.