Venture Capital - Some Revealing Facts

Deloitte recently published their "Global trends in venture capital 2009 global report", a survey of venture capital firms. Here is a quote that sets the stage:

In short, the tourists have left, explained Mark Heesen, president of the NVCA. “Young entrepreneurs who thought they could get rich quickly with just a good idea are now gone and those now left standing recognize the challenges and tenacity needed to establish and build a sustainable business,” he said. “Those out on the hustings trying to get funded are much more astute about the globalization of the economy and worldwide competition. They understand that the value of their company today is not what it will be six months from now and that if they want to be funded, it will likely be at a lower valuation than in the past.”

With depressed valuations on established firms, early stage venture is completely out of favor.



Semiconductor companies are out of favor and "clean technology" is in.



Asian firms will be getting an increased allocation.



The only investor allocation increases are expected to come from governments. Everyone else's VC allocations are expected to shrink. Not surprising.



When asked "Top five locations viewed as having the most to lose in terms of overall economic stature, over the next three years", this is the response.



When asked what governments can do to stimulate innovation, guess what pops up on top. Taxes: it's a sure way to either stimulate or hurt small business.




The overall issue with the VC industry is the length of time to monetization, which has been increasing. LPs just don't have the stomach to wait 10 years for the portfolio companies to be monetized. With the entrance of secondary investment funds, who buy firms from other VCs, the time to monetize a good investment may shorten. Here is a bit of background on this from Business Week:

Longer waits are bad not just for the VC calculating the return on investment (ROI). They also result in impatience on the part of limited partners such as university endowments that invest in venture firms. It's also demoralizing for individual venture capitalists. There are many well-regarded VC partners that have never had an exit. Some venture capitalists are leaving the profession altogether and firms are shrinking.

Here's where secondary VCs can play a vital role. These firms, most of which did not exist 10 years ago, specialize in buying stakes in private companies from VC firms. Some examples include Saints Ventures and W Capital Partners, which are among the most successful firms this decade. Secondary firms now account for roughly 3% of the VC market, but their clout is increasing as they do more deals. San Francisco-based Saints now has more A-list portfolio companies than most traditional VC firms. Its investments include Facebook, eHarmony, and QuinStreet.