Are all of the venture returns in B2B?

The Wall Street Journal has an interesting article today about how the resurgence of tech IPOs have really come from "less glamorous, business-focused companies selling such products as telecommunications equipment and computer storage."  In fact many of these companies have market caps > than $1b each.  The article is right in that alot of buzz gets centered on consumer Internet companies like Google or YouTube and that on absolute market capitalization many of the big returns are found in the B2B type deals.  However, I do disagree with the notion that because some of these "consumer web firms are selling themselves to larger Internet companies such as Google or Microsoft Corp. for a few hundred million dollars or less" means that returns for investors can be mediocre. In fact, what the article fails to look at is how much money some of these infrastructure companies have raised in order to get public.  Obviously if a VC is looking for 10x type multiples on their invested capital, the more money raised means the higher ultimate market cap a company needs to achieve.  Taking this a step further, let's look at the amount of capital raised by some of the more recent IPOs:

Starent Networks: $100mm pre-IPO with first VC round in August 2000, $986mm market cap

Limelight Networks: $100mm pre-IPO with the big round in summer 2006, $1.6b market cap

Infinera Corp: $345mm pre-IPO with first VC round in December 2000, $2b market cap

Shortel: $102mm pre-IPO with first round in 1997,

Based on this data, one can see how many of the existing investors generated some great returns on absolute and relative terms.  So while there have been very few Internet companies worth $1b or more on absolute terms, one must look at the capital efficiency of these businesses to understand why companies that raised $20mm or less can still sell in the $200-400mm range and still create tremendous returns for their investors.  At this level of funding the risk/reward balance is just much different than in a traditional infrastructure play.  Sure many of these Internet companies being financed may not be standalone IPO candidates but that doesn't mean that companies that generate 10-20x for their investors are bad investments either.  However what is beginning to scare me is that valuations for these consumer internet plays are continuing to creep higher.  In addition, many of these "capital-efficient" companies are raising bigger rounds of capital meaning the bar for exiting is getting higher and higher.  If these two factors continue to increase over the next couple of years, this could lead to disappointment for many VCs in the long run.

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