I attended the MIT VC Conference this past weekend, and there has been a fair amount of PR/controversy from the opening discussion. Several well known (and quite successful) venture capitalists were answering a series of questions pertinent to the venture industry and relevant to technology entrepreneurs. The panelists addressed the issue of weather or not the venture industry is in a crisis and if so does the VC industry need to reinvent itself.
The resounding answer was that, yes, the industry needs to reinvent itself. Then there was a long discussion on the issues and what caused the current situation, with some of the general consensus being that there was too much venture capital money in the system chasing too few good investment opportunities, thus destroying returns for the industry as a whole.
I’d agree with that. In fact, I’d hope that people would want to emulate the venture capital industry. Why? Because it shows that the industry is getting has gotten good returns and thus, others want a piece of the action! If the VC industry was total crap no one would want to invest their money in the space. I’d rather be in an industry that everyone wants to be in…
Think about where the venture capital funds come from – usually large pension funds and endowments. These are managed by professional money managers, who seek to create returns for their stakeholders. Pretty simple. If they see good investment returns from a specific sector they will seek to put more capital to work in that sector. Venture had good returns for a while, and so money flowed into venture capital funds, thus depressing returns. If the venture industry had always stunk, no limited partner would have allocated capital to it. The VC industry is a victim of its own success.
So, venture capital funds will have to reinvent themselves. This is exactly what venture capitalists have been asking of their entrepreneurs – the reinvention of large industries through innovation.
I’m pretty sure we can do it. And I’d be bored to be in an industry that was fat and happy.
December 11th, 2008 at 4:32 am
When you say VC's should reinvent themselves. The question is how?
Here are a few I could think of. I am not sure if they are the right ones but would love to hear from you and other VCs.
1. Who they should raise money from? WSJ wrote earlier this week that limited partners are not following through with their capital commitments.
2. When should they make investments: seed, really early, early, growth, bridge, later?
3. Don't chase me-too kind of investments. Take risk and go after ideas that target potentially unproven and large markets
4. Play it safe, and see the existing investments through – not much of innovation here
December 12th, 2008 at 4:07 am
Actually, haven't venture returns been fairly poor over the last 8 years or so (aside from the top quartile or decile funds) ? Also, management fees on a large fund can certainly make a GP rich even if they don't make any money on their investments…so why wouldn't I want to get into the VC biz if I could have access to that kind of economics? Not trying to be negative but I would argue that the compensation scheme for GPs is maybe not set up in a sustainable way.
December 15th, 2008 at 8:10 am
Pretty good points by everyone.
VC returns have been tough since the dotcom bubble burst, with many of the “named” funds creating most of the value.
I’m very curious to see how some of the barbell funds end up doing. These are the funds that make both traditional early stage investments and also make later stage investments (investing on both sides of the spectrum, thus the barbell.) However, often times the barbell looks more heavily weighted toward the later stage investments, because these investments take a much higher amount of capital on an individual basis. Often times, one later stage investment will be the size of 3 to 10 earlier stage investments. Many of these recent investments were made at very aggressive valuations, sometimes with the use of leverage. Some of them could end up not doing all that well, and as many buyout fund investors are realizing, just one or two of these investments going wrong can crush a venture fund’s returns.
So far as how should the VC industry re-invent itself? I think doing earlier stage deals, even seed financing smart entrepreneurs more often. But being brutally aggressive in only continuing to fund the best startups out of these seed programs. Furthermore, developing more ideas in house. Since my time at Atlas, we have seed funded several new ideas that were the creations of our own internal research and used our networking channels to find the right entrepreneurs to get the companies started. We’ve also killed some of these ideas after many months of not being able to put them together – in effect, funding them without really committing anything other than our own time and very small amounts of capital.
I’m open to other ideas as well!