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Good old days of venture

I've been going through my track record as we put our diligence materials together for our new fund.

One stark fact is how the venture business has changed.  My last two operating jobs were at Shiva and New Oak Communications.  Shiva raised a bit more than $8M in four rounds of financing from 1989 through 1994.  That small amount of money came from two blue-chip investors -- Greylock and Kleiner Perkins.  In those days, you dripped the money into the companies (the biggest round was $4M).  Shiva went public in late 1994 with a $200M+ market cap and had a $2.4B market cap at it's peak in June 1996. 

New Oak raised just under $12M in two rounds (including seed capital) in 1996 and 1997.  When we sold the company in January 1998 for $156M, we still had $6M in the bank.  So, in about 15 months we spent almost as much capital as Shiva spent in 5 years.  Things were already accelerating, but no one complained about the outcome.

In looking at the venture deals I have been involved with since 1999 (14 deals), they have averaged $52M+ per deal!  Unfortunately, not all of these companies had a successful outcome, and some of them may require additional capital.  So, significantly more capital has gone into deals since 1999.  Now, that is not a big surprise, but it is still stark to see the contrast.

Of course, the problem is that with $12M of capital per deal, a $75-100M outcome is a very significant win.  With $50M of capital per deal, you need a $300-400M outcome to achieve the same multiple.  I think that there were proportionally many more $75-100M exits in the early to mid 90s than there are $300-400M exits today.  So, it's much tougher for VCs to make the same type of returns now than it was before.  And, that's a good reason why my new firm will be doing something different!

PS - Inflation is a small factor here.  According to my quick check, there has been about 31% inflation in the past 10 years.  So, it does make a difference on capital per deal, but not that big of a difference.

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