Some Venture Math

I’m in the middle of writing a few posts on the economics of venture investing (actually on venture “exiting”) and was therefore pretty interested in the VentureWire 2005 venture m&a stats that came out last week (there were a bunch of articles recapping the 2005 venture exits if you want to Google for them). Here’s some of what was reported: – m&a dollar volume rose 17% to $27.4bn -ont-size: 7pt; line-height: normal; font-size-adjust: none; font-stretch: normal;”> the number of companies bought fell to 356 (from 407 last year) -ont-size: 7pt; line-height: normal; font-size-adjust: none; font-stretch: normal;”> IT companies accounted for $11.73bn of this amount across 221 companies So if you do the math, of the venture backed companies that were bought last year the average purchase price was about $77m. IT companies were lower than the total average, coming in at just over $53m per deal. VC’s spend plenty of time thinking about the exit dynamics of their businesses (thus my future posts on the subject) – it’s interesting to consider the dynamics of tech investing in a market with these kinds of exit profiles. Specifically, sometimes exit expectations don’t match the reality of the market – and these exits (driven by both reality and perception) have important ramifications on the dynamics of capital allocation, company valuations, financing strategies and other key principles of venture investing. It may not exactly be like the real estate market (where they say you make your money by how well you negotiate your initial investment), but optimizing your capital structure is more important than ever before in venture investing.

More on this topic in a series of posts this week. They span a few categories on this blog, so I’m going to put them all under a new title – Venture Economics.

  • Great post, and one pregnant with meaning.
    What I want to know is;
    a) do early stage economics make sense? do vcs produce alphas?
    b) how do early stage economics compare to buy out and expansion economics?
    Perhaps meaning is best derived by way of contrasts.

  • I realy look forward to this, and if I may be so bold as to make a request? I find that great posts sometimes get “lost” in the clutter of things saved. If the posts were eventually published as a PDF that would make it a reference document. I’ve seen this done before (i.e. on how to plan sales cycle forecasts with enterprise software) and it was realy instructive and influential. Kind Regards.