VC returns are everyone's business!

Everyone loves to hate VCs. At the same time, everyone wants to be one. There has been no shortage of stories about the dismal returns in the VC industry. And no shortage of proposed solutions from reducing the industry size to completely changing the model.

I read an interesting article on the Wall Street Journal yesterday with some shocking stats:

Dow Jones VentureSource looked at the percentage of mergers and acquisitions since 2000 that were valued at $250 million or more and found they accounted for a mere 5.1% of venture-backed companies sold during the period.

Think about this from the front end of the funnel. Top notch VCs (with access to lots of deal flow) will only fund about 1 out of every 100 deals they see. What the Venturesource stats tell us us is that VCs on average need to look at over 1,800 deals to end up with one that will exit for more than $ 250M!

Bear in mind that on exit those VCs will only own some of the company. And with the fund sizes in vogue today, they just won't generate enough proceeds to move the needle on their returns.

The article went on to share that "the median price paid for a venture-backed company during the first nine months of the year was $21 million, according to VentureSource. That’s barely above the $16.5 million median amount of equity raised prior to an M&A during the period".

Translation: they're not making money.

As entrepreneurs we need to be concerned about this. It's our problem too. Because free market forces just won't allow this to continue much longer.

Next time you want to bash on VCs, just ask yourself - could you pick out the one gem out of every 1,800 deals you see? I couldn't. I know this ratio points to a broken process. There should not be so much noise and such a low success rate. But it's not just up to VCs to fix. We're all part of it.