I believe that most of the companies that venture capitalists are funding today will find an exit through merger or acquisition. And if we expect to achieve a return in a reasonable time frame of three to five years, we are probably looking at a sale price of $20 million to $100 million. This is the valuation range where most young companies are being acquired.
To compensate for these lower gross return expectations, we must establish initial valuations, usually in the single digits, that can provide an adequate multiple return and internal rate of return. Inevitably, this suggests that a true venture capital firm should be reverting to smaller-scale funds and restricting individual investments in early-stage companies to accommodate the realities of the exit opportunity.
This strategy aligns well with both LP expectations and entrepreneurs' best-case scenarios.
Entrepreneurs themselves seem to be catching onto the new risk/reward equation and seem far more willing, at an early stage, to opt for a sale at a lower valuation and lock in their gains, figuring that they are young and can repeat the process later with another start-up.
If the scenario I have described strikes a chord of reality, then until someone solves the cost of going public and increases the liquidity in aftermarket trading, we as an industry have to downsize our expectation for exits as well as downsize the size of our funds.
Patricof's viewpoint is refreshing, even optimistic, in these uncertain economic conditions. It's certainly a breath of fresh air, and we can only hope that VCs pay attention to his sage counsel.
1 comment:
whoa!!!, you had a passion in blogging, thumbs up for your work of love.. Hehe very inspiring ideas,
anyway I'm william
mind if I put a link back to you?
see my works here ------> Big and Tall Suits
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