Hmm, it’s hard to say how venture capital did in 2012. PEhub has a great post with a lot of good charts on venture capital performance in 2012, ytd, and it looks just ok. The title of the post is great though – ”VC ’12 Year-Ender: We Suck Less!”
From the post: the dotcom bust is finally washed out of the 10 year numbers: “Cambridge Associates US VC Index for a ten year period (ending June 2012) shows a return of 5.28%. That’s worse than Barclays bond index at 5.79% and S&P 500 at 5.33%. But every cloud has a silver lining. VC returns are up from a lousy 1.25% a year ago. Or -4.2% in 2010.”
So I guess the key take away is that venture capital is not performing up to its risk adjusted level. But it is getting better than it was, so we may see some decent gains.
And I guess that means that LP’s are chasing the returns again, if this chart means what I think it means:
I’ve been making an effort to share more on Twitter (Follow Healy Jones on Twitter if you want.) Some of these tweets have been popular:
- RT @ttunguz: Data on the seedpocalypse. What the NVCA data show about silicon valley’s fiscal cliff http://bit.ly/SkvjkQ
- Why won’t MSFT buy share in their most impt market since the PC? RT @ron_miller: Surface Pricing Dooms it to Failure.http://bit.ly/U6yJFe
- Simple but effective logic: RT @dh: The economic logic behind tech and talent acquisitions http://buff.ly/V8kUHL
- Shooting this video was a lot of fun: Local Webinar Taken Over By Mayan Apocalypse Believers http://bit.ly/TqIli1 via @BostInno@officedrop
- 90% employed at startups! RT @BostInnovation: Where is Boston Startup School’s Inaugural Class Now? http://bit.ly/WwVe8C@BOStartupSchool
- Seems like price really matters w/smartphone purchases: RT @businessinsider: iPhone Beating Android In US by @jyarowhttp://read.bi/U0VWbS
- RT Here’s How Retailers Like Target And Nordstrom Are Winning The Battle For Mobile Shoppers http://read.bi/U0RTfN
Not too surprising that a lot of the clicks are on VC/seed investing topics. I’m happy that people seem to like mobile as well – I probably spend half my day thinking/doing mobile related marketing, so it’s good to know that my tweeps are aligned with my interests that way as well.
A new report by BCG suggests that corporate venture capital has become less of a boom and bust driven industry and more of a core part of many companies R&D strategies. They’ve got some powerful facts and figures that suggest the corporate venture capital is hanging on pretty well, despite the tough time that venture capital has had in general over the past 10 years. (I know, I just blogged that venture capital returns are ticking up, but still, it hasn’t been a great decade for almost any investor.)
The report mentions:
“Today, more than 750 corporations around the world have CVC units in operation, according to the report, citing the definitive database of Global Corporate Venturing, a leading industry publication. Between July 2010 and June 2012, these corporations engaged in more than 1,300 transactions.”
“The comparison shows that venture investing is taking root across a broad range of industries. Within the traditional sectors, the percentage of the 30 largest companies with dedicated CVC units has been climbing steadily since at least 2007. In three of four sectors (pharmaceutical, telecommunications, and technology) more than half of the 30 largest companies have such units in place—a sign of the growing recognition of CVC’s value as a tool for innovation, corporate development, and competitive advantage.”
The main thing I happen to think about when I think of venture capital arms of large corporations is how VC activity seems to get hot at corporation at exactly the wrong time. With the exception of amazing funds like Intel Capital, traditional corporate VCs tend to boom and bust at totally the opposite times when they should – entering at the peak and leaving at the bottom. The report indicates that there may be a real change underfoot: “Since the 1960s, CVC has cycled through three distinct boom-and-bust periods, with the bust coming each time as a result of financial-market or macroeconomic downturns. Now a fourth growth phase is under way, leading some observers to suggest that history is repeating itself. BCG argues otherwise, citing compelling evidence that CVC, once an experiment, has entered a new, more mature phase. Not only are new industries entering the arena, but the life spans of corporate venture units have increased steadily in the past ten years.”
I guess I don’t really know. I see impressive strides by Google Ventures, which is making all sorts of Google resources available to the companies they invest in. But regular venture capital arms of big corporations? IDK. Maybe, if they are following the list of best practices mentioned in the report (the following is a direct quote from the press release):
- Operating Principles. Leading CVC units have clearly defined investing parameters. Corporate leadership has committed to venturing for the long term, with the understanding that venture investors, by definition, take risks and that the occasional failure is the cost of doing business.
- Strategy. Befitting their key role in the innovation management effort, successful CVC units are tightly aligned with their corporate parents’ overall business and innovation strategies.
- Knowledge Transfer. Companies with high-performing venture units often designate specific business units to serve as “guardians” of individual investment targets. “The guardians are responsible for ensuring that the knowledge gathered from target investments feeds directly and reliably into the larger corporation-wide innovation pipeline,” said Michael Brigl, a BCG principal and coauthor of the report.
- Leverage of Existing Assets. Successful CVC units also make the most of their corporate resources. Some corporations, for example, give researchers from target companies access to their laboratories, while others contribute manufacturing expertise, offer broader distribution of the target company’s products, or provide administrative support for patent applications.
- Staffing. Finally, proven venturing performers pay close attention to staffing issues, choosing team leaders who combine broad familiarity with the VC landscape with deep understanding of the corporation’s strategy and processes.
I guess the one other thing that I don’t always see well explained by corporate VCs, is, do they exist to make money (i.e. returns) for the corporation or to feed innovation/strategic something-something into the corporation? Because the two are often at odds.
A study has found that getting PR for your startup not only helps get funding (which is obvious) but also helps identify the right kind of PR to help you raise venture capital. The study points out that particular blogs are the ones that venture capitalists are most likely to read., namely TechCrunch, GigaOM and VentureBeat. I’d point out that not all of these are great outlets for getting customers, but OfficeDrop’s experience is pretty similar in that when we get press in these venues we are more likely to get inbound calls from VCs.*
Quoting from the study’s press release: “Besides the fact most venture capitalists only have time to read so many blogs, the research shows that negative coverage of a startup venture has more of an effect than positive coverage. In other words, a venture capitalist is more likely to take notice of a negative blog post about a potential investment than take notice of a positive post. “After all it is more of a rejection process than a selection process,” Aggarwal said. “VCs want to sift through the pile of startup plans on their desks quickly, and are essentially looking for a reason to reject a plan and move on.”
The study also examines how the influence of blogs may change with the progress of a project’s funding rounds. The findings indicate that the effect of blog coverage is strong at the earlier funding rounds, but then it starts to decrease in subsequent funding rounds. “This makes sense, because in the early stages, all they may have is a dream of what they could be,” Aggarwal said. “As time passes, users, usage, and other accounting measures start to give a better signal about their actual potential.””
It is good to see that 10 year venture capital returns are becoming positive as the dotcom bubble burst is leaving the average. Cambridge Associates has data showing that Q2 2012 returns are 5.3%. From the press release, “there was continued improvement in the 10-year period as the strong down quarters of 2001-2002 continued to roll out of the calculation. Additionally, the venture capital index outperformed the DJIA, NASDAQ Composite and S&P 500 across most time horizons with the exception of the 3- and 10 –year periods.”
Note that the returns are highest for the expansion and later stage funds in the 10 horizon. A lot of funds (as in the big, well known successful funds) have now raised either huge multi-stage funds, or growth and early stage funds. We’ll see how they perform now that there is more competition at these fund sizes. There was obviously some aggressive (dare I say crazy?) late late late non-strategic investments in companies like Facebook early last year and the year before. I’ve blogged about those late stage investments being really aggressive before.
I’m having problems actually linking to the press release, but according to the release: “To view the full, comprehensive report, which includes tables on additional time horizons, vintage years, and industry returns, please visit the Cambridge Associates or NVCA websites.”
PWC is reporting that venture capital investments in the third quarter of 2012 are down. From the report: “investment activity declined 11 percent in terms of dollars and five percent in the number of deals compared to the second quarter of 2012 when $7.3 billion was invested in 935 deals. Investment for the first three quarters of the year was $20 billion into 2,661 deals, a level well below this point last year, making it likely that 2012 will fall short of 2011 in terms of both dollars and deal volume.”
The sector data from the report does shed a little light on what’s happening:
Cleantech investing dropped 20% in dollar terms, but stayed flat in terms of dollars.Software was off a little bit as well, and “Internet-specific investing fell 12 percent in dollars and eight percent in deals from the previous quarter with $1.7 billion going into 250 deals but remained well above the billion dollars per quarter level that has been prevalent for the last two years.”
In terms of stage, “First-time financing (companies receiving venture capital for the first time) dollars declined eight percent in dollars to $1.0 billion in Q3, but the number of deals increased one percent to 297 deals in the third quarter.”
It feels like the big thing is a drop in dollars committed per deal. Since companies are require less to get going, since there were fewer big blockbuster $100mm plus deals and since the number of VC funds (and size) are decreasing it all makes sense that we see a decline.
So this is the middle of a major shift in how the US venture market functions. Smaller deals, smaller VCs with a few big funds… this is reality.