Online advertising, digital media, tech economics
In case there was any question, VC returns still suck. At the end of Q2, it was -4.2%. In case there is further question, VC returns will continue to suck for the time being:
venture capital investors should brace for several more quarters of declining performance, adding that “the 10-year return number — which we view as the most reflective of industry performance — won’t begin to reverse its negative trend until mid-2011.”
via Venture Capital’s Incredible Vanishing Returns – NYTimes.com.
I guess it’s a privilege to be a straight shooter.
“I’m still not absolutely convinced that Groupon will be the kind of success we hope it will be,” he said. Nonetheless, “it was too big an opportunity to pass up.”
He also has a nice quote about super angels:
Less competition is good for me,” he said. “I would prefer not to see the super angels out there because they’re competition.”
via Battery Ventures’ Rick Frisbie: Groupon Too Big To Pass Up – Venture Capital Dispatch – WSJ.
I’ve been noodling on this post for the past couple of weeks. It’s very thought provoking but if you look at some of the big tech firms, I think cash was piled up purposely specifically for this purpose so it quickly evolved into an entire industry piling up cash:
Morgan Keegan analyst Tavis McCourt makes that assertion today in a provocative research report. His basic case boils down to this: by piling up cash, large tech companies set the stage for bidding wars over potentially competitive younger companies, resulting in often dilutive acquisitions. His view: if the average tech company paid out 70% of net income in dividends, the stocks would all offer fat yields – and their stocks would likely rally dramatically.
via Are Large Cash Piles Damaging Technology Stock Valuations? – Tech Trader Daily – Barrons.com.
Nice quote from a young entrepreneur. The flip side to this is that the biggest killer of IRRs is time. So build those assumptions into your model and project what you need your exit to be and the venture game just gets harder.
via inDinero’s Jessica Mah: This Is A 20-30 Year Company That We Want To Build (TCTV).
Menlo Ventures, which is in the market for a new fund, will take the biggest chunk of the money from H-P with a $309.3 million pay out, but that’s only going to return a small portion of the $1.5 billion investors committed to Menlo Ventures IX LP, the fund the firm deployed into 3PAR.
via 3PAR Deal Shows How Exit Impacts Can Be Muted For Some Firms – Venture Capital Dispatch – WSJ.
MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER. – Master of 500 Hats.
I am catching up and just read Dave McClure’s investment thesis and found myself wondering whether there is anything that hasn’t been said before.
Venture capital comes down to a math equation: how do you deliver outsized returns in a scalable way?
For many years, it’s been about 1-2 investments that return the fund. The most generic and widely used explanation for this is related to network effects in technology. Call it what you want: natural monopolies, platforms, winner takes all, etc.
If you assume that you can find one of these gems, you can back into the equation and ask yourself how much can you afford to spend to find it? How many deals, how much money, how much time do you need? For an acceptable IRR, anyone can rationalize a $100 million dollar fund size as being optimal for this scenario.
What this difference (vs Dave’s explanation) shows is that a top down analysis will give you different results than a bottoms up analysis. So which is right? Well, as Dave points out, IRRs have been too low for too long so something is clearly wrong with the old way.
Where I stand on the matter is pretty simple. I see a bifurcation of the venture asset class into two types with very different characteristics.
First is the classical VC as it is practiced, but in smaller form. I don’t think new technology comes with new economics. I continue to believe in platform technologies. However, there is clearly too much money chasing this type of innovation. So this old investment paradigm will exist, albeit in a smaller form.
The new VC asset class will have to figure out how to deliver out sized returns in order to sustain itself. These new funds will have to work out the assumptions that will rationalize their existence. Smaller funds, smaller exists, shorter investment horizon. This all boils down to a different investment product type Are there enough deals of this sort to sustain an asset class? Perhaps. The biggest hurdle might be the mismatch between the size of these funds and the LPs that typically invest in them. After all, LPs are lazy too.
Many venture capitalists—especially those working at lesser-known firms that don’t have the same access to the best deals as high-profile firms such as Sequoia Capital and Accel Partners—don’t have much of a track record to show investors as they try and garner new cash. As a result, some venture firms are winding down.
Just for the record, here’s how the numbers break down for the contraction:
Capital committed to venture funds in 2009 was $15.2 billion, less than half of the $28.6 billion committed to them in 2008 and about one seventh of the $105.3 billion VC funds received in 2000, according to the National Venture Capital Association.
via Institutional Investor (this is the print link)
Here are some of the more interesting quotes from the article:
Harvard Business School professor William Sahlman, who has experience working with both venture capitalists and entrepreneurs, has a simple explanation of why some investors continue to invest: “Venture capital is like a second marriage — the triumph of hope over experience. How else could you explain why limited partners continue to invest in firms with mediocre track records?”
That doesn’t bode too well for the future. I think a more simple explanation is in asset allocation and how these huge pools of money are trying to achieve diversification. That means you commit a good portion of your fund to venture capital. But that’s changing because these large funds are not so large anymore:
The endowments of Harvard, Princeton, Stanford and Yale universities, once among the greatest champions of venture capital, are reported to have put up for sale some of their shares in existing partnerships for as little as 40 cents on the dollar.
The reductions, though, may be just what the industry needs to survive. “The shrinkage in endowment money is something I see as a positive,” says Mitchell Kapor, an angel investor and the founder of Lotus Development Corp. “VC funds had too much money to invest well, and that was causing problems. Now supply and demand are better balanced.”
The article describes some gatekeepers and fund of funds are starting to champion the new, smaller funds:
Although most gatekeepers and funds of funds continue to go after big-name VCs, Price’s firm has emerged as a champion of the smaller, innovative venture funds that often are ignored by the larger asset allocators.
The writer takes some time out to make this little jab at the NYC scene:
Even in New York — where success among venture capitalists is often measured more by blog readership than by investment performance — small funds are regaining the limelight. In July, in the midst of a swooning stock market, Milestone Venture Partners scored big when Medidata Solutions, a clinical data company, went public. MVP’s total investment of $552,500 in Medidata yielded a 37 times return and a 1.6 times multiple of its entire fund.
“This is not an asset class. This is a train wreck.”
That’s a nice little sound bite from Frank Quattrone. What I found interesting was that Quattrone says the entire chain needs an overhaul, including the mutual funds that buy into tech IPOs and hold for the long haul:
”The whole approach to marketing and allocating IPOs has to change,” Quattrone said. “The mutual funds that are committed to being long-term holders of the stock—the T. Rowe Prices and the Neuberger Berman Guardians who really understand tech—should get more.”
Because they kept on reporting higher valuations until after the Nasdaq peaked.
It turns out that they were still reporting higher valuations for their funds for two quarters after the Nasdaq peaked. According to Rik Nuenighoff at Cambridge Associates, as late as the third quarter of 2000 venture funds claimed a quarterly return of 12 per cent, while the Nasdaq declined 7.4 per cent.
via Why long-term VC returns are about to crater | Tech Blog | FT.com.
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