1、Mid-life Crisis? Venture Capital Acts Its Age The bursting of the Internet bubble, several years of unfriendly public markets, and changes in Wall Street and financial regulations have been hard on venture capital over the past decade. But not all the pressures facing the industry are external, espe
2、cially in Silicon Valley. The venture community there is showing signs of middle age - moving more slowly and cautiously than before, and hitting fewer home runs than it did in younger, leaner days. As a result, experts say, the sector is having trouble producing the robust performance long associat
3、ed with it. This means investors need to look at venture capital, and its impact on their portfolios, in a new way. For context, consider that back in 1995, Fortune magazine published a story questioning whether venture capital was getting too big and institutionalized to do what it did best: Genera
4、te big returns for investors by finding an entrepreneur in a garage with a good idea, and giving him the money and support needed to grow. One sign of this unhealthy bigness, according to the article, was that the industry had raised an unprecedented $5 billion in 1994. By comparison, VC firms raise
5、d $7.5 billion in the first half of 2010, according to Dow Jones LP Source. To observers, the 2010 number represents both a comeback (firms raised nearly $1 billion less in the same period last year) and a rightsizing (the companies raised more than $14 billion in the first half of 2008, which is st
6、artling given the downward slide on Wall Street and in the economy as a whole later that year.) But the criticisms in the Fortune article - that increasingly fat funds and accompanying fees were changing the venture firms business model, and that the more money VCs raise, the harder it is to find co
7、mpanies that can generate big enough returns - still hang over Sandhill Road (the Menlo Park, Calif., street where a number of firms are located). In 1995, $250 million constituted a mega-fund； today, its not unusual for a single firm to have more than $1 billion under management (via overlapping fu
8、nds) or for a single fund to be $500 million or more. This time around, the VC community is also faced with a potent cocktail of high purchase valuations, long holding periods and cheaper exits, which are knocking the firms for a loop. But those problems would go away, or become smaller, if fund siz
9、es shrank. The capital overhang has fluctuated a bit, but for the most part there is still a huge amount of money out there, says Bo Brustkern, a former venture capitalist who now runs Denver-based valuation firm Arcstone Partners. Its a problem because it means that theres always money flowing thro
10、ugh. Institutional investors look at the top 25 firms and cant get in. They look at the next 25, and theyre closed too, so you go to the next 25 and on downward until you find a firm to put your money into. All of those firms - the excellent, the good and the so-so - compete to place their cash into
11、 companies that need large venture investments, and that have the potential to multiply them several times over. The trouble, of course, is that there are not a lot of places to put $30 million, notes Chris Sacca, one of a handful of an emerging group of super angels who are raising small funds (any
12、where from a few million dollars up to about $100 million) and investing in startups that need thousands of dollars, rather than millions, to get where they need to go. The competition to buy is keeping valuations inflated, according to experts. And the need to invest in six-figure chunks often mean
13、s coming on board later in a startups life cycle, when theres less risk and more ability to put large amounts of money to work. But at that point, its also harder to attain the multiples the firms investors, or limited partners, have grown used to. Moreover, the bigger the funds get, the less the ge
14、neral partners financial interests are aligned with those of their investors. This is because firms get the same 1% or 2% annual management fee and 20% of returns (the carry) that they did when their funds were much smaller. The carry was supposed to be how they made money, while the annual fee was
15、meant to cover operating expenses during the years the money was being invested. But those expenses arent likely to be three or five or seven times bigger just because a firms latest fund is. So management fees have become an important source of profits for VC firms, especially those that have poste
16、d weak and negative returns to their investors in the post-2000 years. Fund size is down, but not dramatically； theyre still oversized because of that fee addiction, notes Sacca. Long-term Trends This is not to say that the venture industrys days are numbered or that bushy-tailed entrepreneurs arent
17、 finding the capital they need； far from it. But the flow of new funds to VCs is constricting and the industry is consolidating, says Wharton professor of entrepreneurship Raffi Amit. In 2009, there were still more VC firms than there were in 1999, according to the National Venture Capital Associati
18、on, but there were 10% fewer venture professionals and 15% fewer funds. This signals that the dead wood is working itself out of the industry finally, Brustkern suggests. You have all these firms that are victims of the delayed or never-happening exit. They invested in their companies years ago, and
19、 arent getting fees anymore and havent raised a new fund, but have a fiduciary responsibility to keep their doors open until the fund winds down. Theyre the walking dead. Yet the industry is seeing plenty of the long-term trends and disruptive technologies that create opportunities. The life science
20、 sectors in the United States are still robust, and cleantech - including clean energy, and environmental and green products and services - is providing an entirely new and promising channel for venture money. Moreover, these companies seem well suited to receive money from todays bigger VC funds, n
21、otes David Wessels, an adjunct professor of finance at Wharton. Taking a new drug, medical device, or wind or solar technology from conception to market requires time and sizable sums of money. But the payoff on a breakthrough biotech therapy can be sizable. And cleantech companies have been able to
22、 do the nearly impossible lately: generate excitement in a depressed IPO market, as evidenced by Teslas recent first-day run-up. Tesla is a bellwether that people are interested in these alternative energy technologies, says Robin Vasan, a managing director at Mayfield, a Menlo Park, Calif.-based VC
23、 firm that has three energy technology companies in its portfolio. Meanwhile, Anthony Hoberman, who advises investors on venture investments at Glenrock Capital Advisors in New York, points out that several technology trends - including the rise of wireless communication, social media platforms like
24、 Facebook, and cloud computing services for businesses and consumers - are creating an environment where venture capitalists tend to do well. The firms invest in small companies that use their agility to overtake bigger, well-funded companies, he adds. That agility is the advantage the VCs exploit,
25、and its no good during periods of slow, predictable change. Vasan, whose focus is software investments, concurs. The growth of social media, smartphones and tablet applications, and web-based software products for consumers and businesses are probably five to ten year trends, he says. Bets have been
26、 placed over the past year and more bets will be placed over the next year or two. Adjusting Expectations But finding companies that are interesting and viable, and that will earn a good return for their founders, is not the same as identifying companies that will provide the multiples that venture investors are seeking. Conventional wisdom says that a VC firm has to expect about half of the
