A very good article by Alan Patricof of Greycroft Partners with his take on the future of venture capital. It reminds me of Jerry Maguire's memo– less money, more personal attention:
His description of our previous/current expectations on size and timing of exits:
The sum and substance of all of these developments is that the
minimum economic level to bring a company public today is at least a
$50 million offering at a $250 million market value. With realism back
in the market and a return to rational metrics, like multiples of
revenues and, better yet, profits, venture capitalists have had to face
the hard reality that it is highly unlikely that taking a company from
start-up to a point where it can justify this type of market
capitalization in a three-, five- and even seven-year time frame is
realistic, except in a limited number of situations.
He says these expectations need to be scaled back, because the economics of venture capital investments have changed:
For these reasons, I believe that the paradigm has changed for the
venture business. We can no longer realistically expect the same kinds
of absolute returns that were achieved in the past through a quick
turnaround from start-up to liquidity through an I.P.O. Rather, I
believe that most of the companies that venture capitalists are funding
today will find an exit through merger or acquisition. And if we expect
to achieve a return in a reasonable time frame of three to five years,
we are probably looking at a sale price of $20 million to $100 million.
This is the valuation range where most young companies are being
acquired.
And where it all starts is with valuations:
To compensate for these lower gross return expectations, we must
establish initial valuations, usually in the single digits, that can
provide an adequate multiple return and internal rate of return.
Inevitably, this suggests that a true venture capital firm should be
reverting to smaller-scale funds and restricting individual investments
in early-stage companies to accommodate the realities of the exit
opportunity. Larger funds can focus on later-stage growth opportunities
that can absorb greater amounts of capital where there still exists the
possibility of taking companies public in a timely manner.
It's all common sense, if you believe that the assumptions have changed the way Patricof does.
ECPM BLOG 