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On February 9, 2009, the NYT published an article by Alan Patricof, “V.C. Investing Not Dead, Just Different”, in which Mr. Patricof says, “Entrepreneurs in this country are stronger than ever, and venture capitalists are the ones to nurture them!”
On February 22, 2009, the NYT published an opinion piece by Thomas L. Friedman, “Start Up Risk Takers,” in which Mr. Friedman says, “You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners — university endowments and pension funds — are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way.”
Mr. Patricof’s comment is incorrect – the Venture Capital stage of the Risk Investing industry does not “nurture” entrepreneurs, their dreams or their seed/startup companies. The VC stage provides Growth Capital for seed/startup ventures that have achieved a level of validation and traction. The Venture Capital stage of the Venture Risk Investing industry has a valuable place – to expand Seed/Startup companies with money, targeted managerial talent and business development/partnership assistance.
Mr. Friedman’s suggestion that the government give $1 billion each to 20 VC firms is downright scary. The thought of giving a failing industry another $400 million a year in management fees is beyond Bank Bailout.
From a NYT article written by Matt Richtel on May 11, 2007, “Some Unrest Is Bubbling Beneath the Top Tier” -
“the venture capital association reported that as of the end of 2006, the internal rate of return for venture funds was only 1 percent over 5 years, but 20.3 percent over 10 years and 16.6 percent over 20 years. Those figures include the amount paid to limited partners and unrealized gains, meaning that the measure does not give a definitive picture of the distributed profits.
For instance, in the first nine months of 2006, venture firms invested $20 billion but paid out $10 billion; in 2005, they invested $23 billion but distributed $20 billion.
Since 1986, 32 firms have accounted for 10% of the venture capital raised but produced 56% of the total returns, said Diana Frazier, a managing director of fund-of-funds manager FLAG Capital Management LLC. She said her calculations, based on confidential data collected by FLAG, understate the discrepancy because they exclude Greylock Partners, Sigma Partners and Sutter Hill Ventures. Mr. Doppstadt said 10 of the some 165 funds that Ford has invested in since 1970 produced about 45% of its returns. “
And, from The Deal Journal (Wall Street Journal) on June 19, 2008 – “The technology bubble popped years ago, but the downsizing of the venture industry continues.
There were 844 venture firms investing in U.S. companies last year, 40 fewer than in 2006, according to the latest data from VentureSource, a research unit of VentureWire publisher Dow Jones. That is down 30% from the bubble year of 2000, when there were nearly 1,200 active investors.
The total includes a substantial number of firms–224, or 27% of the total–who didn’t back any new companies last year, an indication that the ranks of active investors will continue to thin.
While he declined to predict the effect on the NVCA’s membership, Heesen (President of the National Venture Capital Association) said he foresees a 15% decline in the next two years in the total number of venture firms investing in the U.S., many of them too small to meet the NVCA’s membership threshold of $5 million under management. The NVCA has about 470 member firms representing 90% of the venture capital under management in the U.S.
Many of the active investors in 2007 did only a few deals. Less than half–45%–completed four or more investments. And 29% made just one investment. About 550 firms have made at least one investment in a U.S. company this year, according to VentureSource.”
These numbers continued to show a decline and concentration in the VC stage since Mr. Richtel published his article in 2007 and even since The Deal Journal (Wall Street Journal) published its article less than one year ago.
The Venture Risk Investing industry is divided into 3 distinct groups: (1) Seed/Startup; (2) Traditional VC and (3) Exit
They are systemically, operationally and attitudinally different. They have different metrics for acceptance and success; funding, oversight, sourcing, profitability and, most importantly, infrastructure.
The Venture Capital stage of the Venture Risk Investing industry has a valuable place – to expand Seed/Startup companies with money, targeted managerial talent and business development/partnership assistance.
The VC stage of the Risk Investing industry will, and should, contract. The remaining VC firms should continue to live on what they are supposed to do – finance and help build companies to take them to an exit.
An attention grabbing and very poorly timed analogy – the VC stage of the Risk Investing industry is analogous to the Mortgage stage of the Construction industry.
The innovative, job creating and true wealth creating stage of the Risk Investing industry is the Seed/Startup stage. And the Seed/Startup stage is analogous to the construction loan stage of the Construction industry – a good piece of real estate with an understanding of what the market wants to buy.
The investment bankers of the Dot.Com froth are analogous to the House Flippers of the recent Real Estate insanity.
Please review the powerpoint – The START Fund -
http://www.slideshare.net/ElliottDahan/start-fu...
I look forward to all comments.
Thank you,
Elliott Dahan
Elliott(a)thegrowthgroup.com