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  • 1. the king is dead, long live the kingthe once and future state of venture capital david aronoff general partner flybridge capital partners david@flybridge.com 1 Flybridge Capital Partners 2010
  • 2. agenda•  the VC model needs an upgrade•  clues from history•  implications for entrepreneurs•  semi-random thoughts 2 Flybridge Capital Partners 2010
  • 3. 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 3 Flybridge Capital Partners 2010
  • 4. the way it was •  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 patient4 Flybridge Capital Partners 2010
  • 5. 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© Robert Mankoff, New Yorkerwith thanks to Prof Bill Sahlman, HBS •  LP patience waning b/c returns suffer & great recession impact 5 Flybridge Capital Partners 2010
  • 6. the dream exposed6 Flybridge Capital Partners 2010
  • 7. time for an upgrade US Venture Capital Returns: Inception to 3/31/08Source: Venture Economics, Prof. Paul Gompers HBS n=1927 7 Flybridge Capital Partners 2010
  • 8. product refresh underway Less Capital Being Committed Fewer Professionals Investing US VC Fund Raising and Funds Closed Venture Professionals 653 10,000 $120 700 9,000 $100 600 8,000 VC Funds Closed 451 $B USD Raised $105 500 7,000 $80 6,000 321 400 5,000 $60 $55 239 241 251 300 4,000 206 211 221 $40 $39 3,000 163 200 $29 $32 $36 2,000 $19 $28 70 $20 100 1,000 $9 $12 $- $6 0 0 1980 1987 1988 1997 1998 2007 2008 2009E Includes: General Partners, Managing General Partners, Venture Partners Dollars FirmsSource: NVCA 8 Flybridge Capital Partners 2010
  • 9. we’ve seen this movie before PEAK Accelerating 1999/00 1983 Free Fall 1997-99 1969 2000-2002 1981-83 1983-85 1967-69 1969-71 Vintage Year IRR Top Quartile 10% Median 2% 26% 12% Firming Bottoming 2009-? 2003-08 2009 1991-96 1990/91 1986-90 1975-80 1974 1971-74 TROUGH investing through the trough offers strong opportunitiesSource: Brooks Zug, Harbourvest Partners 9 Flybridge Capital Partners 2010
  • 10. 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. 10 Flybridge Capital Partners 2010
  • 11. 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 11 Flybridge Capital Partners 2010
  • 12. set the wayback machine12 Flybridge Capital Partners 2010
  • 13. 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 13 Flybridge Capital Partners 2010
  • 14. implications for entrepreneurs what the new model means:•  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? 14 Flybridge Capital Partners 2010
  • 15. implications for entrepreneurs what the new model doesn’t mean:•  venture investors wont 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? 15 Flybridge Capital Partners 2010
  • 16. 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 16 Flybridge Capital Partners 2010
  • 17. 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” 17 Flybridge Capital Partners 2010
  • 18. 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) 18 Flybridge Capital Partners 2010
  • 19. discussion19 Flybridge Capital Partners 2010