An important trend is taking place in the venture marketplace – it is taking longer for VCs to exit their investments.

In 1995 (before the Internet boom), the average software acquisition occurred 48 months after a company was launched. Initial public offerings were made at an average of 56 months into a venture. In 2007, M&A happened on month 65 and IPOs on month 67. That’s a significant change – 35% and 20% later, respectively.

What’s unclear to me is whether or not this trend will reverse over time. If the time to exit continues to lengthen it could have a number of consequences. Some of the potential impacts include:

• Longer LP Commitments: Venture funds are designed in such a way that their limited partners are required to commit capital for about 10 years. However, with an average five and a half years to IPO, there are bound to be companies that don’t exit for up to a decade, meaning that LPs may be required to commit their capital for a longer period.


• Increased Liquidity Premium: LPs agree to lock-up capital in a venture fund for up to 10 years due to the expectation that the risk they taking in having the capital tied up (which may mean they miss future investment opportunities) is compensated by higher returns. If the lock-up period increases, LPs will likely demand a higher return (or they’ll invest their money elsewhere such as with hedge funds or leverage buyout firms).


• Lower Valuations: If VCs across the board need to generate higher returns (and they can’t increase their time to exit) they will likely require greater ownership of their portfolio companies, translating into lower valuations of startups and greater dilution of entrepreneurs.

This scenario is a losing situation for everyone and I am optimistic that the market will evolve back to shorter exit times as the M&A and IPO markets enter future legs of their cycles. However, it’s important to continue to watch these dynamics as they could have industry-wide consequences.