There was a very interesting article in the Wall Street Journal recently talking about how the gap between the venture capital invested in firms and the amount they are getting sold for is narrowing.

"According to data from Dow Jones VentureSource, the median acquisition value of a venture-backed company in 2009 was $26 million, which is 1.3 times the median amount of venture capital - $19.8 million - that these companies raised in their lifetimes. That’s less than the 1.5x multiple in 2008, and well below the 3.6x experienced in 2007. In fact, it’s the smallest gap since the dark times of 2003 when the multiple sat just above 1."

The service focused firms which includes social media, dotcom and retail as well as the business and financial services focused companies haven't fared as badly but even for them the multiples are drastically down from their heydays.

Why does this matter?

It is a generally known fact that VCs do not expect block-buster deals for every one of their investments. Even they are aware that 40% will bomb, 50% will return the investment and 10% will be the super duper deals that they will be remembered for. It's the average multiple for all these transactions that is being referred to above. Hence, if the sector is only returning a 1.3x over an average investment period of 5 years, that's an IRR of about 5%, which certainly does take the venture capital industry closer to an existential crisis.