London's VC Confidential

I’m in London, Ontario this morning for the Deloitte/RBC-sponsored “VC Confidential” event, hosted by TechAlliance. The event is sold out, so there are bound to be more than a few local entrepreneurs, Angels, CEOs and University types to meet. For London, a sold out VC event is a pleasant surprise, as there are so few VC-backed firms in the region, despite boasting a population base not dissimilar to neighbouring Kitchener-Waterloo. (More on that tomorrow).

One of the reasons why so many people flock to events about venture financing is the simple reality that there will always be homeruns in this business – you just have to match up a great idea with the appropriate investor base. Going me are reps from Growthworks (Maxx-Phillippe Hollott) and Genesys (Jamie Stiff).

The Q4 2007 venture stats are out from the U.S.-based NVCA, and they continue to remind all of us that venture investing is a more profitable enterprise than the buyout world over the long term; and I don’t mean just for the periods where the 1998-2000 NASDAQ run are overweighted. Ignore what you read in the newspaper; long term buyout returns pale in comparison to VC returns.

Which begs a question. If long term VC returns exceed those of Buyout, why do Canadian pension funds, such as CPPIB, continue to prefer buyout fund managers over VC types? Perhaps they believe i) there are not enough fantastic Canadian VCs to invest in, ii) since they can’t get in to Seqoia or Battery, there’s no point in backing anyone else, even if the median returns are superior, and/or iii) no one ever got fired for buying IBM (or the pension fund version of that truism: no one ever got fired for committing US$600 million to Apollo, even if it was at the peak of the global buyout and easy credit cycle).

Here are the recent net median return numbers, according to Thomson Financial’s publicly released return data:

One Year:

Early/Seed VC: 11.7%
Balanced VC: 24.2%
Later Stage VC: 31.9%
All Venture: 19.5%

Small Buyout: 13.8%
Med. Buyout: 23.8%
Large Buyout: 22.1%
Mega Buyout: 21.1%
All Buyout: 21.2%

Five Year:

Early/Seed VC: 4.3%
Balanced VC: 12.3%
Later Stage VC: 10.4%
All Venture: 8.5%

Small Buyout: 7.9%
Med. Buyout: 11.8%
Large Buyout: 14.8%
Mega Buyout: 16.2%
All Buyout: 15.2%

Ten Year:

Early/Seed VC: 35.5%
Balanced VC: 15.7%
Later Stage VC: 9.1%
All Venture: 18.3%

Small Buyout: 4.2%
Med. Buyout: 9.3%
Large Buyout: 7.7%
Mega Buyout: 8.7%
All Buyout: 8.3%

Twenty Year:

Early/Seed VC: 20.9%
Balanced VC: 14.6%
Later Stage VC: 14.6%
All Venture: 16.7%

Small Buyout: 11.9%
Med. Buyout: 12.5%
Large Buyout: 12.7%
Mega Buyout: 12.0%
All Buyout: 12.2%

There you have it. Over a twenty year investment horizon, the average VC firm beat the average buyout shop, regardless of the size or stage of the transaction in question. Mind you, they both beat the NASDAQ (10.9%) and the S&P 500 (9.3%), which explains why the long term trend of capital migrating from stock and bond funds to private equity is irreversible.

Dennis Gartman emailed a CNBC anchor last night to say that the commodity run was over, and he was diving headfirst into tech stocks. Perhaps the institutional investing community will hear stories such as that, and begin to look at venture capital funds once again.

With Celtic House, Edgestone, JLA Venture Partners, VenGrowth and Ventures West all soon to raise new capital, there hasn’t been a better time for domestic and international institutional investors to take a fresh look at the Canadian VC industry.

MRM