Study: While Still Negative, Venture Capital Industry Experiences Long-Term Improved Growth

(July 27, 2011) — While still in negative territory, venture capital performance has continued its climb as of the first quarter of 2011, according to the Cambridge Associates US Venture Index, the performance benchmark of the National Venture Capital Association (NVCA).

The firm found that as of March 31, the 10-year return was -0.1%, compared to a return of -2% as of Dec. 31 and -4.6% as of Sept. 30. The figures showed that the returns were fueled by the performance of venture capital investments over the past year, which had seen 18.5% returns as of March 31, compared to 13.5% as of Dec. 31 and 8.2% as of Sept. 30.

According to the consulting firm, the improvements were witnessed across all time horizons, with the exception of the 15-year numbers. “The quarter marks the second consecutive one in which there were double digit returns for the one-year horizon and modest improvements in the three-, five-, and ten-year performance numbers,” a release on the returns noted. Venture capital returns outperformed the public indices in the one-, five-, 15- and 20-year horizons.

“Slow and steady improvement has been the name of the game in venture performance for the last several quarters,” said Mark Heesen, president of NVCA, in a statement. “The venture capital industry is coming through a very turbulent period in US economic history and recovery is going to take time, even with the improving exit market we have seen in the last year. But make no mistake that we are headed in the right direction and we expect these gains to continue throughout the coming year. Overall, this should be encouraging for the upcoming class of companies preparing to exit as well as new companies just entering the pipeline.”

Theresa Sorrentino Hajer, Managing Director and Venture Capital Research Consultant at Cambridge Associates, added: “The one-year return was strong and the longer-term performance continued to improve. The five-year return, which outperformed public indices, encompasses the recent recessionary period, the recovery and now three quarters of good IPO activity. The improving exit environment is encouraging and should continue to boost performance in 2011.”

The report by Cambridge Associates follows previous data by Dow Jones VentureSource, which showed that venture capital firms provided 5% less funding to start-ups during the second quarter of 2011 compared to 2010. The number of funding deals made between start-ups and venture capital firms also decreased by 2% between the two quarters. The healthcare sector experienced the greatest losses, with capital investments down 17% from Q2 2010, and deals down 12% from Q2 2010. The lone bright spot in the healthcare sector was in medical IT, where 19 deals worth $158 million amounted to a 27% increase in capital invested and a 58% increase in deals.

Between the first and second quarters of 2011, deals and capital investments both increased by 19%, according to a press release from the NVCA. A source at VentureSource told aiCIO that it is dangerous to put too much stock into these increases, however, because of seasonal trends in venture capital.