Summary
Consensus in the industry that it's a bad time to be a VC. Not enough home-runs. Industry becoming more the font of outsourced R&D for big firms. Many investors worried that only a handful of firms will break even on the current crop of funds, much less produce stellar returns. Only IPOs are one-off companies, not hot new stuff. SarBox is making IPO less appealings. Acquisitions disappointing: time to acquisition is longest in 20 years and returns small. Yet a lot of money around. Billions of dollars in VCs' coffers fight to get in what few great companies there are. Driving up valuations, VCs paying more to get into the best deals. Terms between venture guys and their investors getting harsher. (Published: 03/10/07)
Notes:
- bad time to be a VC
- anyone who says different is either
- works at one of the few firms having a good year
- numbers look great on the surface:
- value of deals rose a solid 8% of Q2 of 2007
- investors pumping $7.4b into emerging companies
- money is funding some legitimately exciting frontiers
- web2.0: $500m in H1
- cleantech: $1.1b in H1
- IPOs up for the year
- Q2: venture-backed companies tapped the public markets for $2.73b
- most raised in a 3-month period since 2000
- Q4: 46 companies looking to file
- but: closer look at numbers reveals disturbing trend
- IPOs
- mainly one-off companies that were founded years ago and have slogged away at building solid businesses for a half-decade or more
- no big overall tech movement that's getting Wall Street revved up
- feeling mutual among entrepreneurs
- Sarbanes Oxley and other regulations have made the prospect of going public far less appealing
- picture worse for acquisitions
- Q3: $10b, but spread among 90 deals
- typically companies that have been plodding for 6+ years, chewing through $30m in VC cash, to eventually get bought for $50m or so
- median length of time it took companies to get bought was longest since Dow Jones VentureOne started measuring 20y ago
- meanwhile, valuations keep rising
- as billions of dollars in VCs' coffers fight to get in what few great companies there are
- venture firms not destitute
- have plenty of "base hits"
- but: "home runs" increasingly elusive
- Venture capital is a home-run business, where the top 10% firms make up nearly 80% of the returns.
- many investors worried that only a handful of firms will break even on the current crop of funds, much less produce stellar returns
- VC veteran's wondering whether they should get out/build a startup
- unless something changes, VC is in for upheaval
- industry may become more the font of outsourced R&D for big firms
- less breeding ground for the next great tech powerhouse
- returns will be lackluster for the majority of firms left out of the best deals
- current calamity has been long time in the making
- since NASDAQ bubble, firms learned the hard way that you could no longer take companies from idea to public in 18 months
- instead, "it's a business of building companies, it's a business about people, gut calls, and the art of building a portfolio one deal at a time"
- paradox:
- venture industry has been downsizing, but those investing in the venture industry as a whole only wanted to invest in venture firms more
- i.e. world's largest pension funds and institutions
- money wanted to get into a shrinking business
- is giving marginal firms another shot, keeping shakeout at bay
- web 2.0
- only one company, YouTube, had a $1b plus outcome when purchased by google
- only handful have sold in the hundreds of millions
- because the costs of starting these businesses are so low, venture investors own smaller stakes than they did in the last Web bubble
- clean-tech
- has seen a few exits
- two IPOs in 2007 so far, 3 in registration
- but: deals have been small
- most of the clean-tech market is still experimental, in both technology and market opportunity
- valuations are on the rise
- venture investors paying more to get into the best deals
- valuations are an important barometer of who holds more power at any given point in the Silicon Valley economic cycle
- the higher a valuation, the fewer shares a VC's dollar buys, and the more leverage entrepreneurs have
- high valuation not all bad news for the venture set
- e.g. step-ups in valuations between rounds mean that on paper early stage investors are showing gains
- valuations typically driven up by the prospect of an IPO or big acquisition
- now they're mostly being driven up by the piles of money looking for the next hot deal
- venture investors getting all the drawbacks of a hot market
- competition to get in on the deals and high prices
- without the benefits (blockbuster IPOs and acquisitions)
- NVCA: almost half of venture investors surveyed predicted a decrease in the number of VC firms even as returns improve overall
- terms between venture guys and their investors getting harsher
- limited partners increasingly demand lower management fees and so-called "key man" provisions
- "key man" provisions give investors an out if certain rock-star partners leave a firm
- bright side
- with so much cash floating around the Valley, entrepreneurs have never had it so good
- lot of dumb ideas are getting funded, but nearly any great idea has a good chance of getting funded too
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