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April 03, 2006

The elusive Billion Dollar exit and why it matters has an article on how billion dollar exits for VCs are now largely history and how this phenomenon is impacting the business.

In the past four years, only five venture-backed information technology companies have achieved billion-dollar valuations (see table). Two were in China, one was based in Eastern Europe and the remaining two, Google Inc. and Inc., hailed from the San Francisco Bay Area.

Worse, still, for limited partners placing their money with venture investors seeking oversize returns, since the end of 2001, only 19 venture-backed startups have even achieved valuations exceeding $500 million on the day of their IPO or trade sale, according to VentureOne, a San Francisco-based research firm.

...The median valuation of venture-backed startups that completed IPOs declined from $454 million in first-quarter 2000 to $166 million in 2005. VentureOne reports there were 9.5 times more information technology company IPOs in 2000 than 2005.

...Venture capital investors at 3i Group plc, for example, began explaining in 2002 that they were funding companies with the goal of selling them off in a few years for about $250 million. Other venture capitalists laughed at the London-listed venture firm, but they eventually took to mimicking that business strategy.

However, as Granite Global Venture's Thomas Ng explains in the article, this has not prevented VCs from "swinging for the fences". In fact, going for the "big one" still remains core to VC business model.
"Today, in my profession, the objective is the $1 billion deal," insists Ng of the trans-Pacific venture firm, one of the few to hit the jackpot with one of their portfolio companies last year. "If you don't get $1 billion, it's hard to define who you are. Some of those 2-, 3- and 5-times returns can make back your management fees, but if you don't get 20-times returns sometimes, it's hard to make good overall return."

Hat tip: Paul Kedrosky

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.