Top venture firms of 1998
By Cheryl J. Myers
Red Herring magazine supplement
Going Public 1999
The venture capital business is risky, but it's easy to forget that fact
when Internet companies with virtually no earnings are raising record
amounts of cash through initial public offerings, and when private
technology companies are acquired for similarly impressive amounts. While
IPOs saw some rocky times last year, many VC firms still earned impressive
returns through their portfolio companies' IPOs.
Departing from the method used in last year's issue, this time Going Public
ranks 1998's top VC firms by the percentage gain of the stock of its
technology portfolio IPOs from the time of the IPO until year-end. We chose
this measure rather than market capitalization gain so as not to exclude
smaller issues with remarkable percentage gains. One drawback of this
method, under current market conditions, is that the stock of companies that
went public later in the year had less time to appreciate; the method also
disregards mergers and acquisitions -- often a lucrative exit strategy for
VCs but one that cannot be compared using the same criteria. Our latest
rankings, which were compiled by Venture Economics, are based solely on
venture-backed IPOs and exclude companies that conduct most of their
business outside the United States, as we have done in the past.
Going Public's top-performing VC firms are Benchmark Capital and Maveron --
both invested in eBay (Nasdaq: EBAY), which appreciated by more than 1,300
percent. Nine of the top 25 firms invested in Exodus Communications (Nasdaq:
EXDS) (including 7 companies whose sole portfolio IPO was Exodus), which
appreciated by 287.1 percent.
One of the more interesting additions to this year's list is Intel, whose
Corporate Business Development Group tied (with W.S. Investments) for No. 3,
with a return of 633.3 percent from its investment in Inktomi (Nasdaq:
INKT). The group's emphasis is on expanding the market for Intel products,
including PCs and workstations, but its 1998 IPO proved that it has the
financial and strategic shrewdness to compete with the nation's
top-performing VC firms. The investments of Microsoft and Sumitomo had
similar successes in 1998, with IPOs that placed them at No. 5 and No. 19,
respectively.
Although our top 25 firms earned impressive returns from IPOs, the total
capital raised in these offerings by venture-backed technology companies
increased only 5 percent from 1997, according to the investment-research
firm VentureOne. A possible reason is that the number of venture-backed tech
IPOs decreased for the second year in a row. The drop hasn't deterred VC
firms from investing in new companies, though. In fact, according to
PricewaterhouseCoopers' MoneyTree survey, 1998 was a record year for
technology venture financing: the year's investments totaled $10.8 billion,
up 30 percent from 1997 and up 96 percent from 1996.
With new investments in tech companies at a record high and with a less
predictable market for IPOs, many of these companies (with the blessing of
the VC firms backing them) may seek to be acquired rather than go public.
But after the headiness of 1998 -- when, as VentureOne observed, VC-backed
companies entering the public markets earned record valuations -- many
companies may be unable to resist the temptation of an IPO.
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