'Hotel California': The VC Market's Investment-To-Exit Ratio Is A Record High... Is This Why?

Tyler Durden's picture

While Silicon Valley's technorati may be "living it up," new data from Pitchbok suggests the Venture Capital world is stuck in 'Hotel California' and "can never leave."

As Pitchbook.com's Katie Clark reports, opting to raise more funds rather than prioritizing an exit seems to be an increasingly popular route for startups.

According to data from the 2Q PitchBook-NVCA Venture Monitor, the number of US venture capital investments for every VC-backed exit reached a record high in the first half of 2017 - landing at 11.3x. For the 3,917 VC investments completed in 1H, there were just 348 exits.

If the trend continues in 2H, the US VC industry will experience the lowest exit levels since 2010. Similarly, but to a lesser extreme, investment count may end the year at the lowest mark in five years - 2012 was the last year the total number of financings in the US fell below 8,000.

Why is this happening? Companies are choosing to stay private longer as is evidenced by the data shown below: The average time to exit has hit roughly six years through 1H 2017. More specifically, median time to IPO now exceeds eight years, time to buyout is hovering around six-and-a-half years and time to acquisition has landed at about four-and-a-half years.

Both the number of US VC investments and the number of US-based exits have been on the decline since 2014. That year, capital exited reached a record high of $82 billion with more than 1,000 exits closed. Facebook’s $22 billion purchase of messaging platform WhatsApp certainly threw the numbers off a bit, but it was still a landmark year in many ways.

In the first half of this year, roughly $25 billion was returned to investors via 348 plus exits—about 30% of 2014’s totals and less than half of last year’s.

Perhaps this is why...

Ironically this report drops on the same day as a new study finds that 'fake unicorns' abound with an average 49% valuation overstatement in VC land... (via Naked Capitalism)

A recent paper by Will Gornall of the Sauder School of Business and Ilya A. Strebulaev of Stanford Business School, with the understated title Squaring Venture Capital Valuations with Reality, deflates the myth of the widely-touted tech “unicorn”. I’d always thought VCs were subconsciously telling investors these companies weren’t on the up and up via their campaign to brand high-fliers with valuations over $1 billion as “unicorns” when unicorns don’t exist in reality. But that was no deterrent to carnival barkers would often try to pass off horses and goats with carefully appended forehead ornaments as these storybook beasts. The Silicon Valley money men have indeed emulated them with valuation chicanery.

Gornall and Strebulaev obtained the needed valuation and financial structure information on 116 unicorns out of a universe of 200. So this is a sample big enough to make reasonable inferences, particularly given how dramatic the findings are.1 From the abstract:

Using data from legal filings, we show that the average highly-valued venture capital-backed company reports a valuation 49% above its fair value, with common shares overvalued by 59%. In our sample of unicorns – companies with reported valuation above $1 billion – almost one half (53 out of 116) lose their unicorn status when their valuation is recalculated and 13 companies are overvalued by more than 100%.

Another deadly finding is peculiarly relegated to the detailed exposition: “All unicorns are overvalued”:

The average (median) post-money value of the unicorns in the sample is $3.5 billion ($1.6 billion), while the corresponding average (median) fair value implied by the model is only $2.7 billion ($1.1 billion). This results in a 48% (36%) overvaluation for the average (median) unicorn. Common shares even more overvalued, with the average (median) overvaluation of 55% (37%).

How can there be such a yawning chasm between venture capitalist hype and proper valuation?

By virtue of the financiers’ love for complexity, plus the fact that these companies have been private for so long, they don’t have “equity” in the way the business press or lay investors think of it, as in common stock and maybe some preferred stock. They have oodles of classes of equity with all kinds of idiosyncratic rights.

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Too-Big-to-Bail's picture

Hopefully I can Snap up some Blue Apron Shares before they're all sold out

Stuck on Zero's picture

Another way of phrasing the situation: billionaire investors don't want to share ownership with the public.

Ramesees's picture

I just got a pitch book for a compression company (like Silicon Valley, the show) that has raised $140mm and is in its "final round" 8 years after inception.

Why am I getting this opportunity to buy shares when the Series A thru Y (probably) haven't taken them up on the option?

The company must be so overvalued that it's now a ponzi and the only way for the A's to get out is to sell their shares to me.

Not buying. I hope I don't regret when Google buys it for $10bn next year, but I don't care what the technology is when the financing for it is so shady.

Pernicious Gold Phallusy's picture

Maybe there's nowhere else to park the money.

I suspect the VC firms wouldn't throw their partner's money away.

Wrenching Away's picture

All made possible by Fed funny money

Rebelrebel7's picture

I think that the secret coroorate crony socialist economy is the hotel California. 

Originally, I started thinking of the economic unfeasibilty of paper towels, being large, cheap, resource intensive, shopping product all over America and found out that International Paper and Koch Ind ustedes are the two primary resources for pulp, which ship to other organizations to process it. International Paper is listed as a defense contractors and receives government subsid is. I do not know if Koch Industries does or not.

There are 45,530 square feet per acre. I would guess that 20,000 HEADS of broccoli could grow on an acre. The cost is $2.00 to the consumer. The farmer would likely sell at $1.00 A head. So he would recieve $20,000 in income before expenses for that acre. Expenses would involve equipment, and any fertilizer or chemicals that he would use, ( i prefer organic) and paying wages for any employees. 

Del Monte has changed hands many times over.


So is it economically feasible to compete without government subsidies as a business in the current economy with 190,000 companies listed as defense contractors receiving government subsidies?


I would like to abolish the Federal Reserve, but many things must also happen, like businesses and the government, and the banks being honest! 

Currently, 8 out of ten new businesses fail within the first 18 months. This is not surprising if they are competing against subsidized corporations.

Please, stop the lies!!! This is an economy that nobody can believe in!

taketheredpill's picture



Just read an article (here? can't find it now) on KIK's launch of an "ON-APP" CryptoCurrency "KIN".  The App's founders will keep a portion of the ICO.  So if the App / KIN takes off the Crypto currency will rise and monetize the founders (there is nothing to stop any KIN holder from converting to ETHER etc.).

The Crypto Currency is effectively a share in future growth, so an IPO without an IPO.

Monetization for founders is based on demand for "ON APP" cryptocurrency, based on app usage and NOT advertising.




two hoots's picture

The economy has picked up a lot of hanger-oners.  They are all over with so much money sloshing around.  I think much of this will be shed at some points or points but the basic economy/markets will survive without much turbulence.     

Grandad Grumps's picture

Free money rules over policy.