Venture capitalists spent 2013 doing something they haven’t been able to for a while: reaping enormous returns.
At least 10 U.S. venture firms generated more than $1 billion each in returns from initial public offerings and acquisitions this year, according to filings and data compiled by Bloomberg. Consumer Internet, business software and e-commerce companies contributed to the gains.
Rewards that great -- for such a range of firms -- are scant in venture capital. Venture returns have lagged the public markets for the past decade, leading to a contraction in the number of funds. Following last year’s blockbuster paydays from the IPOs of Facebook Inc. and Workday Inc., the wealth was spread in 2013 as Twitter Inc., Zulily Inc., Nimble Storage Inc. and other companies went public at valuations topping $1 billion. The last time so many sizable venture-backed IPOs took place was more than a decade ago, according to Renaissance Capital LLC.
“The door had been closed for a long time,” said Edwin Poston, a partner at TrueBridge Capital, a Chapel Hill, North Carolina-based firm that invests in venture funds. “There’s a wide variety of companies that have the critical mass to go public, and there’s a little more risk tolerance these days.”
The roster of venture winners included some of the top Silicon Valley firms, such as Sequoia Capital, Benchmark, Accel Partners, Kleiner Perkins Caufield & Byers, Norwest Venture Partners and New Enterprise Associates. Other venture firms that are further away from Sand Hill Road in Menlo Park, California - - often referred to as the Wall Street of Silicon Valley -- also made the cut, including Spark Capital, Union Square Ventures, Emergence Capital and Maveron LLC.
In total, 12 venture-backed companies went public in the U.S. this year with market capitalizations above $1 billion at the time of the offering, up from nine in 2012 and the most in any year since the late 1990s dot-com bubble, said Renaissance Capital, an IPO investment adviser in Greenwich, Connecticut. The Bloomberg IPO Index, consisting of stocks in their first year of trading, has climbed 56 percent this year and is headed for its best year since 1999.
Venture capitalists, who often bet on companies before they have revenue or even a product, count on big deals to make up for all the money they lose from the vast majority of startups that flop.
“It has been a good year for the venture industry, which has been bolstered by a strong IPO market,” said John Locke, a principal at Palo Alto, California-based Accel.
Spark Capital out of Boston and New York-based Union Square Ventures made sure East Coast venture firms captured their share of gains. They each generated more than $1 billion from Twitter and got an added boost from Yahoo! Inc.’s $1.1 billion purchase of Tumblr Inc.
Emergence Capital in San Mateo, California, turned a $4 million investment in Veeva Inc. into a stake worth about $1.2 billion after the maker of Web-based software for the medical industry went public in October. Maveron, based in Seattle, parlayed a $4.6 million investment in e-retailer Zulily into shares worth about $1 billion, and got an added boost by its stake in newly public Potbelly Corp.
The rising market has helped some lesser-known venture firms boost their profiles, said Mark Cannice, a professor of entrepreneurship at the University of San Francisco.
“Naturally, there is a bit of a broadening of the very well qualified but not necessarily brand-name firms,” said Cannice. “It really boils down to getting to see the right deals and doing their homework.”
Cannice writes the quarterly Silicon Valley Venture Capitalist Confidence Index Report, a survey of Bay Area investors. According to the last report, released in October, confidence rose for a fifth straight quarter to the highest level in six years.
The gains recognized by pension funds and endowments, which provide the capital to the venture industry, have yet to be fully reported. As of June, venture-capital returns over the past decade averaged 7.8 percent a year, according to Cambridge Associates. The Wilshire 5000 Total Market Index, consisting of a broad gauge of U.S. securities, was up 8 percent.
One reason for the underperformance is that companies have been staying private longer, raising rounds in the hundreds of millions of dollars from private-equity firms and hedge funds, said Paul Bard, director of research at Renaissance Capital.
“There’s been such ample liquidity and a lot more money thrown at these companies privately, so the impetus to go public just wasn’t there,” Bard said. “There’s quite a large number of companies out there in the pipeline.”
Of Silicon Valley’s usual suspects that had billion-dollar years, Sequoia Capital returned around $3 billion in liquidity, with big gains from the IPOs of security software maker FireEye Inc. (FEYE:US) and Nimble Storage. Kleiner Perkins topped $1 billion from a late-stage investment in Twitter, the IPO of Silver Spring Networks Inc. and selling its stake in AutoTrader.com.
Accel, which generated a record return last year from Facebook’s IPO, won big again by backing Nimble, selling mobile-advertising firm MoPub Inc. to Twitter (and now holding Twitter shares), selling mobile-payments company Braintree to EBay Inc., a deal that’s yet to close, and some smaller IPOs.
Across the street from Accel, Palo Alto-based Norwest reeled in more than $1 billion from the IPOs of FireEye and RetailMeNot Inc. NEA reached that mark from its investment in Tableau Software Inc. alone, and had additional wins with Cvent Inc. and ChannelAdvisor Corp.
Benchmark also hit the 10-digit returns mark this year. The venture firm owns more than $1 billion of Twitter shares and smaller stakes in Wix.com Ltd. and Marin Software Inc., which also went public in 2013.
Not all venture-backed technology IPOs yielded winning streaks for investors. Violin Memory Inc., a storage company that went public in September and was backed by SAP AG’s venture arm and Highland Capital Partners, among others, has lost more than half its value since its IPO. And textbook rental company Chegg Inc., funded by Kleiner Perkins, Foundation Capital and others, is down about a third since its November IPO.
Still, as high-profile IPOs grab attention, talk of another bubble is inevitable, especially when a pre-revenue company like Snapchat Inc., which lets users send disappearing messages, turns down a $3 billion acquisition offer from Facebook.
While valuations have been rising, the biggest beneficiaries are companies that are using the Web and social-media tools to grow at faster rates than they ever could in the past, said Renaissance’s Bard.
“With the growth, scale and network effects of online businesses, you can grow very quickly,” Bard said. “We definitely see multiples staying high, but it’s earmarked for a select group of companies.”
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