Venture Capital Suffering from Low IPO Yield

Venture Capital Suffering from Low IPO Yield

If there’s one statistic that typifies the problems that the venture capital industry has faced in recent years it is IPO yield – the number of initial public offerings divided by the number of companies financed five years earlier. This figure captures the industry average share of portfolio companies that exit in the most lucrative way for investors.

IPO share of investmentsClick for larger image

Since the end of the Internet bubble in 2001, the number of venture capital financed companies that have gone public has dropped substantially. At the same time, venture capitalists have been investing in more start-ups than they used to. As a result, the ratio of IPOs to start-ups funded five years earlier has plummeted.

From 1991 to 2000, IPOs accounted for 17.7 percent of companies financed by venture capitalists five years before. In contrast, from 2001 to 2010, the number of venture capital backed IPOs was only 1.4 percent of the number of companies that were financed a half decade earlier.

Here’s the industry’s problem in a nutshell: if only one out of 71 of their portfolio companies goes public, venture capitalists are going to have a hard time making money.

Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.