Upload
david-aronoff
View
595
Download
0
Embed Size (px)
Citation preview
1 Flybridge Capital Partners 2010
the king is dead, long live the king the once and future state of venture capital
david aronoff general partner
flybridge capital partners [email protected]
2 Flybridge Capital Partners 2010
agenda
• the VC model needs an upgrade • clues from history • implications for entrepreneurs • semi-random thoughts
3 Flybridge Capital Partners 2010
some facts
• 1972 to 2007, ~2500 VC-backed IPOs in US – 13% of all public firms at end of 2008. – 8% of market capitalization ($2.0 trillion) – 6% of total employees.
• Particularly true in high-technology industries.
• VC appears ~3 to 4x more powerful than corp R&D – From late 70s to mid-90s, VC was only 3% of corporate
R&D, but responsible for ~10%-12% of privately funded innovations.
source: Lerner
4 Flybridge Capital Partners 2010
• basic premise: an overabundance of great ideas + an undersupply of capital = only “best” ideas get funded
• a sector supports 4-5 players – 1 is a home run – 2-3 are “ok” outcomes – 1-2 holes in the ground
• “healthy” industry loss ratios
• LPs can afford to remain patient
the way it was
5 Flybridge Capital Partners 2010
the way it is
• situation: an overabundance of similar ideas + an oversupply of capital = nearly every good idea got funded
• sectors have 10+ combatants – 0-1 is a triple. 0-3 are “ok” – 6-10 holes in the ground
• vc loss ratios go through the roof
• LP patience waning b/c returns suffer & great recession impact
© Robert Mankoff, New Yorker with thanks to Prof Bill Sahlman, HBS
6 Flybridge Capital Partners 2010
the dream exposed
7 Flybridge Capital Partners 2010
time for an upgrade
US Venture Capital Returns: Inception to 3/31/08
Source: Venture Economics, Prof. Paul Gompers HBS n=1927
8 Flybridge Capital Partners 2010 Source: NVCA
Includes: General Partners, Managing General Partners, Venture Partners
$55
$105
$39
$9 $12 $19
$29 $32 $36 $28
$6
451
653
321
206 163
211 239 241 251 221
70
0
100
200
300
400
500
600
700
$-
$20
$40
$60
$80
$100
$120
VC F
unds
Clo
sed
$B U
SD R
aise
d
US VC Fund Raising and Funds Closed
Dollars Firms
Fewer Professionals Investing Less Capital Being Committed
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000
10,000
1980 1987 1988 1997 1998 2007 2008 2009E
Venture Professionals
product refresh underway
9 Flybridge Capital Partners 2010
Free Fall 2000-2002
1983-85 1969-71
Bottoming 2003-08 1986-90 1971-74
Firming 2009-?
1991-96 1975-80
Accelerating 1997-99 1981-83 1967-69
PEAK
TROUGH
1999/00 1983 1969
2009 1990/91
1974
Source: Brooks Zug, Harbourvest Partners
10% 2%
26% 12%
Vintage Year IRR Top Quartile Median
we’ve seen this movie before
investing through the trough offers strong opportunities
10 Flybridge Capital Partners 2010
so …
• clearly VC has been very important driver of innovation and wealth creation
• but: – low returns for past decade – tremendous randomness in exit markets – far too many companies funded – calculus of funds doesn’t solve – embroiled in secular & cyclical trough
• has become at best a short-tail phenomenon and at worst a random-walk.
11 Flybridge Capital Partners 2010
what happens next
• the number of VCs must shrink – NVCA estimated 10% in 2009, 15% more in 2010 – PCG predicts 1500 firms to 500 within 5 to 7 years
• accordingly, amount of money and number of limited partner investors will decrease
• this won’t happen overnight – VC partnerships are 10-12 years in duration, and
they’ll drag out last fund in hope of hail maries
• trickle down impact – fewer numbers of startups will get funded – smaller financings due to decreased VC fund sizes
12 Flybridge Capital Partners 2010
set the wayback machine
13 Flybridge Capital Partners 2010
that 70’s show
• VC circa 1970’s – take the good
• small funds (in dollars & professionals) • generalists wrt industry focus / versatile • collegial approach / lots of syndication
– size of funds & firms -> so smaller financings – longer horizons until liquidity
– ignore the irrelevant • bootstrapped companies - no startups (mid/late 80’s phenom)
– adapt the model to the current environment
• Much of this is happening organically already
14 Flybridge Capital Partners 2010
implications for entrepreneurs
• focus on capital efficiency until inflection point – garage: bootstrap model – over longer period, CFBE – seed-like: quicker time to lift-off (or crash) on short $$ – supersized first rounds: will be harder to come by
• concentration on new areas w/huge potential SoM – new media, energy-technology, revolutions – fewer me-toos (salami model)
• financing models morph – angels /seed funds /VC get along because they have to – full-funded staged approach?
what the new model means:
15 Flybridge Capital Partners 2010
implications for entrepreneurs
• venture investors won't invest in early-stage ideas – it’s the charter of our fund and most others
• investors only look for epic returns (10/100x) – my crystal ball is really no good
• VCs are replacing angel investors – but we’re actively making seed investments
• bellbottoms are back in style – did they ever really go out?
what the new model doesn’t mean:
16 Flybridge Capital Partners 2010
semi-random thoughts #1
• VC performance is highly persistent – good continue to do well, but so do poor performers!
• this is true for entrepreneurs and investors
• deal sourcing is key factor – successful entrepreneurs have returns that are 50%
greater than first timers or those who failed last time • success more likely for first timers than those who failed last time
– 50% of the outperformance of top fund is due to higher concentration of serial entrepreneurs
• VC value-added is greatest with first timers
source: Gompers, Lerner, Sahlman
17 Flybridge Capital Partners 2010
semi-random thoughts #2
• funding/opportunity size ratio – not all big opportunities require big financings, at least
at first, sometimes at all – but some types of investments require huge rounds
early on; don’t know if they’re good bets, just know I won’t place them
• being first matters a lot – the tao of glen garry glen ross
• mike maples’ “thunder lizards” • “gap” vs “gretzky”
18 Flybridge Capital Partners 2010
semi-random thoughts #3
• home-run mentality – Are VCs bound to the home-run model or should they be more
focused on OBP? – I suggest that both the home-run and OBP models don’t work,
but a hybrid of both is warranted (shameless self-promotion)
19 Flybridge Capital Partners 2010
discussion