Venture Outperforms Nasdaq

U.S. VCs saw double-digit returns in 2004, but many funds are still weighed down by the post-bubble downturn.

April 11, 2005

Venture capital returns for 2004 more than doubled those from the Nasdaq Composite Index and the S&P 500 in the U.S., according to a study released Monday by an industry group.

VCs saw returns of 19.3 percent on average last year. The Nasdaq returned 8.6 percent and the S&P 500 garnered 9 percent. Early-stage investors got the biggest bang for their buck, pulling in 38.9 percent on their investments, according to a study by the National Venture Capital Association.

“Favorable valuations and healthier activity in the exit markets translated into higher returns for venture capital funds at year end,” said Mark Heesen, the president of the NVCA.

Generally, VC investments should compensate backers for the additional risk they take on shaky startups and often-unproven technology. VCs have returned 15.7 percent to their backers over the last 20 years. The Nasdaq has offered 12.4 percent returns over the same time period.

However, venture returns over the last three years have underperformed both the Nasdaq and the S&P, despite the recent improvement. The return on venture investments was down 2.9 percent, while the Nasdaq was up 3.7 percent and the S&P returned 1.8 percent.

Last year found venture-backed buyouts and IPOs at their highest levels since 2000. Ninety-three companies went public, raising $11 billion, and 333 startups got acquired for a total value of $15.1 billion.

The early figures for 2005 don’t look as promising. Only 10 venture-backed companies went public in the first quarter. They raised a total of $720.7 million, a 74 percent drop from the same quarter in 2004 (see Fewest IPOs Since 2003).

VC firms have continued to raise funds, despite lackluster returns. Menlo Ventures, for example, raised a $1.2 billion fund last week. Its last two IPOs raised less than $180 million combined (see Menlo Raises $1.2 Billion).