NVCA: Venture Capital Finally Returned More Than It Took in 2012

5/28/13Follow @curtwoodward

It’s no secret that venture capital has struggled since the dot-com implosion. The latest dispatch from the industry’s U.S. trade group, however, says there might be some promising signs of better performance.

In a new report wrapping up the 2012 performance for VCs, the National Venture Capital Association says the broad industry finally returned to the black last year—“the first post-bubble year in which venture funds collectively distributed more cash to limited partners than they brought in,” association president Mark Heesen said in a statement.

Yes, you read that right. Despite all the breathless press celebration of tech industry megadeals like Facebook, Instagram, and Tumblr, it’s the first time in a dozen years that overall venture capital wasn’t a money pit.

The NVCA compiled the results by turning to research firm Cambridge Associates, which pulls performance data from the firms themselves but anonymizes the individual returns, giving a picture of the overall industry.

Its analysis of some 1,420 VC funds formed since 1981 found that VC funds lagged several different measures of U.S. stock market performance in the past 10 years, a reasonable amount of time to discern venture performance. Things look better, of course, once you increase the window to 15 or 20 years.

Heesen adds some hope that 2012′s positive performance will “take hold in 2013,” although he acknowledges that acquisitions and IPOs have been relatively slow in the first half of this year, putting a lot of pressure on the second half of 2013 to deliver some big windfalls for venture fund investors.

The VC industry has been hoping for those “exit” opportunities to pick up for some time now.

Venture investing delivered generally great returns through the `90s, but since the dot-com crash, the sector overall has not lived up to its historical performance standards. That’s led to criticism from the pension funds and foundations that invest in VC, and fewer venture funds operating in the U.S. as underperforming firms are forced to shut down.

Consequently, power and money concentrates in the hands of larger, established firms, which tend to be located near traditional tech hotbeds.

Peter Mooradian, who helped compile the NVCA study for Cambridge Associates, says fewer firms should improve performance for VC overall. “A more reasonable supply of capital pursuing deals should translate to further improvement, but the exit markets will need to cooperate more broadly as well,” he said.

Translation: There were too many VCs in the game recently, and a smaller number of them should raise the quality of investments. Now, Wall Street and the big companies need to do their part and start buying more of the startups that VCs bankroll.

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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