Introducing the U.S. Venture Exit Year Index by Correlation Ventures

How did the U.S. venture industry perform last year in terms of cash-on-cash realizations?

One would think that this would be a simple question to answer given the many sites, journals, and organizations publishing VC industry data.

However, “vintage year” statistics provided by Cambridge Associates, Venture Economics, and others require seven years or more to have sufficient realizations following the vintage to draw meaningful conclusions. Other publications report data on acquisitions and IPOs in recent years, but not bottom-line industry returns. Some indices, such as the Cambridge Associates LLC US Venture Capital Index®, report changes in total net returns quarter-by-quarter, but don’t isolate realized multiples.

Unable to find it elsewhere in the ecosystem, we decided to create and offer an index of U.S. venture exit year realized multiples. We hope this index will prove helpful for us as an industry to identify and respond to more recent trends.

At Correlation Ventures, we’ve spent years building what we believe is the most complete database of financing level outcomes in the industry, which includes over 80,000 financings since 1987. Here is the index generated from our database as of December 31, 2016:

The solid blue line reports mean, dollar-weighted, gross realized multiples for all equity investments in U.S. venture funded companies that exited each year (i.e., went out of business, were acquired, or went public). The dashed green line reports the 90th percentile multiples.

For example, the mean gross return for all dollars invested into companies exiting in 2016 was 2.2X, while 10% of these dollars realized a return of 4.9X or higher. Please see the note at the end of this post for additional details on the methodology.

The U.S. Venture Exit Year Index indicates that realized multiples have generally increased over the past decade. They reached a high point in 2013, following a low point in 2009. While returns declined in 2016, the absolute multiples were still higher in 2016 than in any year during the first half of the decade.

Looking under the hood, some trends we identified include:

• More capital efficient companies. The primary driver of the increasing returns since 2009 appeared to be that companies required less capital from founding to exit. Exit values also increased, but that increase was not as great a driver of the higher multiples.
• Rising pre-money valuations. Higher prices appeared to be the primary cause of the drop in realized returns last year. They were not offset last year by any increase in exit values or capital efficiency.
• Robust by industry group. The increases in returns over the past decade, as well as the decline last year, occurred for example in both the tech and life science sectors.
• IRR’s followed a similar trend. They also peaked in 2013 following a low point in 2009, and dropped last year.

A key lesson for investors and entrepreneurs from these findings: capital efficiency and valuations matter.

Want to know how the U.S. venture industry performs in terms of realizations in 2017? Check back here in about a year.

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If you are entrepreneur raising or working with a team that is closing a round, we would value any introductions where we might be helpful as a co-investor.

Correlation Ventures is the predictive analytics pioneer in the venture capital industry and the industry’s leading co-investor. With more than $350 million under management, we’re one of the most active U.S. venture investors, investing in about two to three new investments a month. Over the last five years, we’ve invested in over 140 companies. Correlation offers a dramatically better option for lead investors, syndicates, and companies seeking additional venture capital to fill out a round. We offer the most rapid, convenient, and reliable source of co‐investment capital in the industry; for example, committing to make investment decisions within two weeks or less. Correlation is backed by leading institutional investors.

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Methodology Note: The Correlation Ventures database is derived from commercial data providers such as Dow Jones Venture Source and others, as well as proprietary data. It contains over 80,000 equity financings (including convertible preferred debt financings) since 1987 in U.S. headquartered companies in which at least one firm characterized as a venture fund participated. Returns for companies that went public are based on the median stock price 6 to 9 months after the IPO. Returns in acquisitions are based on realized returns, without factoring in potential future milestone payments. Correlation has spent considerable effort to identify companies labeled as “still private” in commercially available datasets but are actually out of business. As one validation of our dataset and methodologies, please note that when we calculate total returns by vintage year (versus realized returns by exit year, as presented above), we get similar results historically to the industry standard reports produced by such groups as Cambridge Associates and Venture Economics. Our estimates are extrapolated from reported returns at the financing level; there is inherently some error and variability in these extrapolated estimates and our best estimates for historical time periods may change in the future.