The Return of Returns

Justin Hibbard

If we had any doubts about the VC business returning to its former opulence, they disappeared last night at Onset Ventures' soiree at the Quadrus Center in Menlo Park, Calif. We're talking oysters on the half shell, 2003 La Crema Pinot Noir, Recchiuti chocolates, a jazz combo, and multiple art exhibits. Making the scene were Dick Kramlich from New Enterprise Associates, Heidi Roizen from Mobius Venture Capital, and too many others to mention. Maybe it was the occasion that made Onset spring for the good stuff--the firm was celebrating its 20th anniversary. But we think it may have just as much to do with the VC industry's recent returns.

We want to delve into the returns released this week by Thomson Ventures Economics, but we would be remiss without first providing some context. Listen up, class. These figures represent average returns for the VC industry in aggregate. They're based on data supplied voluntarily by VCs, and VCs don't share everything. (Would you?) The figures are based partly on "internal rates of return" (IRR), which are the VCs' best guesses about the value of private-company shares in their funds--not the actual value of stock and cash doled out to their investors. Generally, these data are useful for sensing which way the wind is blowing.

Thomson's latest figures are for last year's third quarter. The researcher reports returns in five categories: investments made 1, 3, 5, 10, and 20 years ago. Returns were up from last year's second quarter in all categories except 5-year returns, which include a lot of losses on bubblicious 1999 investments. Thomson attributed the gains to the increasing number of VC-backed companies going public or getting bought (24 and 83, respectively, in the third quarter, including mighty Google).

One figure that stood out: returns on investments made in the third quarter of 2003 were up 8.9% in the third quarter of 2004. That's quite a jump in just 12 months. "Balanced" VC funds, which invest in a lot of second and third financings for startups, were up 17.7%, lending credence to the chatter we hear about well-performing startups commanding lofty valuations when they raise follow-on funds.

One startup mentioned frequently at the Onset party was Technorati, the blog-ranking service, which has raised about $11 million from Hummer Winblad, Mobius Venture Capital, and others. That company may get some competition from a new entrant founded by former Venture Strategy Partners VC Tony Conrad and incubated by Blacksmith Capital. Could this nascent venture have something to do with WayPath? Stay tuned.

Before it's here, it's on the Bloomberg Terminal.