A lot of our early stage entrepreneurs are concerned about where their funding will come from in the next 12 months or so.
I did some research and came across these comments (see below) in The New York Times (7 July) about the American VC industry. While Australia does not follow the American industry 100%, quite often the trends are similar, if somewhat delayed.
Returns are at all time lows and many American VCs see three major factors that need to be addressed within the VC industry:
• Funds have grown too large
• MBAs have invaded the industry
• Older partners have lost touch with the latest technology.
“I personally believe and I think the evidence proves that the venture industry has gotten too big, the funds have gotten too big,” said Alan Patricof, an investor for 40 years, who backed America Online and Apple, at a recent venture investing conference in San Francisco. “Our biggest challenge today for venture capital is to think smaller.”
“Mr. Patricof is part of a growing chorus of voices calling for the amount of money in venture funds to shrink drastically to levels last seen two decades ago. His firm, Greycroft Partners, is taking a retro approach with a $75 million fund that makes smaller investments.”
There are about 880 VCs in the US. Predictions are that 30% to 50% could disappear, mostly because of bad returns. The National Venture Capital Association reported that returns across the industry were just 6% in 2008. Clearly, that is not sustainable and will cause a major disruption in the industry.
There will be “a ton of venture capitalists who disappear over the next 18 to 20 months, and it’s going to be painful for awhile,” Bryan Roberts, a partner at Venrock, told The Times. “But the best thing that could have happened to VC is this economic crisis, because it’s lowering the flow of capital into these funds.”
Most venture capitalists say the trouble began amid the excesses of the dot-com era when there was plenty of venture capital around. Many start-ups were given more than they really needed.
Over-financing resulted in too many firms backing too many start-ups that do the same thing, some critics say, and it inflates the valuation of companies so that investors get smaller returns when they eventually sell.
Here’s another issue…
Mr. Andreessen and Mr. Horowitz also attribute the venture industry’s struggles in part to the business school graduates who now populate Sand Hill Road offices, taking the place of the entrepreneurs who first formed venture firms. (Mr. Andreessen is a founder of Netscape, and he and Mr. Horowitz founded Opsware, a software company bought by Hewlett-Packard.)
When too many venture capitalists serve on a start-up’s board with “no proper judgment, who have never built a company,” they tend to get too involved in running the company and, in high-pressure situations, imagine problems that do not exist, Mr. Horowitz told The Times. “Their insecurity and own anxiety filters into the advice,” he said.
Franklin Pitcher Johnson, a veteran venture capitalist known as Pitch who founded Asset Management Company in 1965, agrees. He had this advice for would-be venture capitalists at a recent conference: “Get a real job in an operating company, because what we back is operating companies – until you understand that, you can’t be much of a venture capitalist.”
I’m sure that there will be others who have completely the opposite views. However, I find in interesting that some VCs are taking a close look at how they operate and are questioning the models that were so prevalent in the pre-GFC era.
These comments highlight the fact that the VC industry is doing some hard thinking about their future and the role that VCs play in helping entrepreneurial businesses grow.
I wait to see how these trends will impact in Australia.
Until next time.
Gail Geronimos, is the founder of Achaeus, which helps entrepreneurs develop their businesses and she has just started a new site www.pitchingtoinvestors.com with tools and tips about how to develop killer presentations to raise capital.
To read more Gail Geronimos blogs, click here.
Smart Company is a sister publication to The Mandarin, catering to Australia’s entrepreneurs, small and medium business owners and business managers.
