A Look Back at Venture Capital in Recent Years

The year is almost over, and what better time to take a look back at the state of venture capital over the past few years than now.

Distributed to Paid in Capital (DPI) Multiples

First off, which year between 2006 and 2013 would you guess would have the best DPI multiples?  Would you guess perhaps 2009, when the economy was approaching bottom, as having the highest return multiple?  Or, perhaps 2006 or 2007, when the global economy was booming?  Or, perhaps right now, with economic growth just starting to bubble?  Here’s the result, according to private equity and venture capital data provider Pitchbook.

Interestingly, according to Pitchbook,the winner (as of now) is 2007, with A DPI multiple of a little over 0.9x.  In second place is 2008, following closely behind by 2006 and 2010.  All three years are close to 0.7x.

The weakest performing years are 2011, 2012, and 2013, with DPI multiples still below 0.3x.  This is unsurprising given that the longer amount of time a fund has been in existence, the higher the chance of distributing capital.

Source: Pitchbook

 

What about the RVPI and TVPI measures?

First, let’s define these measures. The RVPI acronym stands for “residual value to paid in capital”.  Essentially, when a fund is in its early years, RVPI or the unrealized multiple is more representative of future returns than DPI because it represents potential future cash flows. The RVPI measures the remaining market value of the fund’s capital which has not yet been realized. The calculation is simply the result of the residual value (or fair market value) divided by paid in capital.  As with any venture capital investment, investors are generally aware that the RVPI is a rough estimate, and may end up being far from the final cashed-out values.

The TVPI is “total value to paid in multiple”.  The TVPI is simply the fund’s investment multiple, and generally is considered to represent the total value created by a given fund. The measure is the sum of DPI and RVPI.  Another way of calculating it is to divide cumulative distributions plus residual value by paid in capital.  Unsurprisingly, this value can fluctuate considerably until the fund is fully realized.

With these definitions, which year would you guess has the highest RVPI and TVPI measures?

Interestingly, the winning TVPI year is 2010, with a TVPI value of 1.58x.  This result is not really all that surprising given that the global economy was just beginning to expand again in 2010 following a couple years of subpar economic performance.

In second place is 2007, the year in which the global economy peaked.  It’s interesting that the beginning of the expansion year and the peak year are the top two years.  Venture capital sometimes yields some interesting results.

Source: Pitchbook

Conclusion

In looking at the performance of venture capital from 2006 to 2013 by fund year, the results suggest that the years with the best performance measures are either the peak or bottoming economic years.