The State of Venture Capital [Reformatted]

The State of
Venture
Capital
by Georges van Hoegaerden

VERSION 3.03
1998-2012 © All rights reserved

1998 - 2012 © All Rights Reserved by The Venture Company |
version 3.03

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Focus on economics

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innovation =
∞
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venture capital
arbitrage = ∑

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“Who the
[expletive] is this
guy?”

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“Fred Wilson and Tim Draper used to be
“Georges is a ﬁrst-rate truth teller, and guiding lights within the industry. Georges,
unlike anyone else I've met in the VC you've cut the legs out from under it, and
community so far.” replaced the gas lamp with neodymium-
Researcher Harvard Business School focused xenon torch.”
CEO

“You are the subject-matter

180+
expert of Venture.”
"Your state of VC along with many of
Finance Journalist
your posts have been great guides for
wisdom in this industry."
Principal, China VC Fund
"Absolutely the most rational
piece that has been written on
the reasons why the VC industry
“This is a very thoughtful approach and
will need to incorporate some
many of the top plan sponsors and LPs
changes going forward."
are aggressively looking at ways to
Politician
address the gap you’ve outlined. This is
very well done."
Fund-of-Funds manager
“Your insight and analyses are the best. “Really Outstanding Vision of The Industry.
Every LP should read Georges' articles!” You should be running things in Washington,
Chairman, Investment ﬁrm DC.”
Chief Technology Officer

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Reach of 45,000+

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Georges
van Hoegaerden
Managing Director, The Venture Company
Founded in 1998 in Palo Alto, California

Hindsight, insight and foresight
‣ Raised over $15M in Venture Capital, produced triple
digit returns
‣ 4 time startup entrepreneur, CEO and board director
‣ 17 years in Silicon Valley
‣ 30 years of complete spectrum and global
experience in Engineering, Sales, Business
Development, Product Marketing, Management
‣ Venture Catalyst Worldwide New Media products at
Oracle Corporation, sold ﬁrst release products
‣ Venture Partner, Private Investor
‣ New Age Economist (by fate)

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Who cares about
Venture Capital?

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20
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20 %
of GDP
contribution

Source: NVCA

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Venture Capital was born
in 1946 with the founding
of
American Research and
Development Corporation
by Georges Doriot

First home run:
10 years later >70,000% ROI
with Digital Equipment Corporation

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Superior economics of
technology

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Superior economics of
technology
Software is an intellectual
Low-cost manufacturing arrangement of bits

Zero-cost distribution The Internet is “free”

Taps into a global
Immediate global market impact meritocracy and reach

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After 60+ years of Venture Capital investing:

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1B
people without
fresh water

Source: 2010 ITU/UNESCO estimates worldwide high-speed internet access to be roughly 8%
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1B 6.4B
people without people without
fresh water high speed
internet

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Health Knowledge
1B 6.4B
people without people without
fresh water high speed
internet

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The internet is
the foundation of
a new global
meritocracy

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The internet is
the foundation of
a new global
meritocracy

Economy > Technology

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Our economic competitiveness
is at stake

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So, how we develop, discover and promote
technology innovation should be embedded
in an intelligent, renewable and
accountable economic construct

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What is Venture Capital?

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Anything developed Anything developed Anything funded
in Silicon Valley? by an entrepreneur? by a VC ﬁrm?

What is Venture Capital?

A small business (SME)
Small Private Equity? Voodoo?
with big aspirations?

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The art ofmakingpromises

Social
Startup Economic
Value

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keeping
The art ofmakingpromises

Social
Startup Economic
Value

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Venture Capital
is a ﬁnancial system and arbitrage
designed to deploy high-risk / high-yield
from groundbreaking innovation

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Venture Capital

Arbitrage

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Money Idea

Arbitrage

Venture
Capitalist
Limited Entrepreneur
Partner
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VC
Limited arbitrage Entrepreneur
Partners by
General Partners

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Innovation marketplace

VC
Limited arbitrage Entrepreneur
Partners by
General Partners

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VC
Limited arbitrage
Mone Entrepreneur
Partners by
General Partners

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VC
Limited arbitrage
Mone Idea Entrepreneur
Partners by
General Partners

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Commitments Allocations

Capital calls Investments

VC
Limited arbitrage
Partners by
General Partners

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Commitments Allocations


VC
Limited arbitrage
Partners by
General Partners

Liquidity Equity

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It is the theory which
decides what can be
observed
"Whether you can observe a thing or not depends on the theory which
you use.” - Albert Einstein

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“GPs Are Essentially
Service Providers”
Eric Hirsch, Chief Investment
Officer at Hamilton Lane
January 28th, 2010

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Is the performance of the
“service provider” or
derivative indicative of
the potential of the
“GPs Are Essentially underlying asset?
Service Providers”
Eric Hirsch, Chief Investment
Officer at Hamilton Lane
January 28th, 2010

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Venture Capital

Financial
system

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Horizontal diversiﬁcation in Asset Management

Emerging
Real Estate
markets

Fixed Assets Public Equity

Private Equity Buyout

Venture

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1: LP diversifies in Alternative assets
2: Diversified in Direct and Fund-of-funds
3: Diversified in Venture, PE, Buyout, Hedge...
4: Diversified in multiple VC Firms
5: Diversified in multiple Funds
6: Diversified in multiple GPs
7: Diversified in many Companies
8: Diversified in multiple Rounds
9: Syndicated with multiple Peers
10: Split up in Tranches

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Venture


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to the investment thesis
Lack of accountability
Venture


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LP1 LP2 LP3 LP4 LP5 LP...

Investor socialism

FoF hybrid FoF hybrid Vague PPMs:
Investment networks?
No critical PIPES in a Venture
path Fund?
Who is responsible?
VC firm VC firm VC Syndication?
Define early-stage?
Greener pastures?

Fund Fund Fund Fund

GP GP GP GP GP GP GP GP GP GP GP

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I have been a victim of VC’s ‘moving
goalposts’ - it cost me years, a million +
dollars and damaged my credibility!

President, software company

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Venture Capital

High risk

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$25M+
The cost to produce a technology company
with any meaningful Social Economic Value
capable of producing a viable Venture return

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The MoneyTree (*) hides an ugly reality:

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The MoneyTree (*) hides an ugly reality:

Not everything that can be counted,
can be counted on.
(*) The MoneyTree™ Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson
Reuters

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Idea is Idea is Technology A customer
born feasible works buys

Original Venture Capital
by Vinod Khosla

Capital
Seed R&D Go-to- Expansion
capital capital market capital
capital

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Valuation

by Vinod Khosla

Capital
capital

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Valuation

by Vinod Khosla

Risk
Capital
capital

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Valuation
The wrath of
“capital efficiency”

Risk
Capital
capital

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Subprime
Risk Venture Capital
deferral &
deﬂation Return
deﬂation

Valuation
The wrath of
“capital efficiency”

Risk
Capital
capital

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Technology Marketplace execution M&A IPO SEV

Downside Upside
SEV=Social Economic Value

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Uniform funding trajectory of innovation =
subprime
$250K $1M $5M $20M

Downside Upside

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subprime
$250K $1M $5M $20M

downside risk

Downside Upside

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subprime
$250K $1M $5M ? $20M ? ?
downside risk

Downside Upside

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subprime
$250K $1M $5M ? $20M ? ?
downside risk

upside risk

Upside Upside Upside Upside
discount-1 discount-2 discount-n discount

Downside Upside

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Venture Capital trending model (*)

Venture Capital fund vintage

Standard deviation of risk
Amount of money

(*) based on witnessed VC deal selection and intake criteria, standardized deal terms and syndicates

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1980
Amount of money


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1980 1990
Amount of money


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1980 1990 2000
Amount of money


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1980 1990 2000 2010
Amount of money


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1980 1990 2000 2010
Amount of money

Innovation Innovation
outliers outliers


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1980 1990 2000 2010 2020
Amount of money

Innovation Innovation
outliers outliers


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Posted Feb 29th, 2012 on Walt Mossberg’s All Things

To many investors, visionary entrepreneurs
come off as naïve or worse — isn’t it safer/
easier/more proﬁtable to create a(nother)
social network for cat fanciers than to try to
cure cancer, defeat terrorism, or organize the
world’s information?
— Bruce Gibney, in a post on the Founders Fund Web site entitled “What
Happened to the Future?”

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Venture Capital

High yield

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Constituent Measurement


Limited VC
Money Ideas Entrepreneurs
Partners arbitrag

Liquidity Equity

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3. Venture Capital 3. Fund returns


Limited VC
Partners arbitrag

Liquidity Equity

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2. Asset Management 2. IRRs


Limited VC
Partners arbitrag

Liquidity Equity

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1. Public 1. 360˚ Trust


Limited VC
Deploy reserves Money Ideas Entrepreneurs Buy products
Partners arbitrag

Liquidity Equity

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ROI
1. Public 1. 360˚ Trust


Limited VC
Deploy reserves Money Ideas Entrepreneurs Buy products
Partners arbitrag

Liquidity Equity

Buy
shares

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Metric 3:
U.S. Venture Capital, 10 year trailing performance
(post bubble)

0%

* Source: IRRs from Feb 2012, Cambridge Associates

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Metric 3:
(post bubble)

VC
-4.6%*

0%


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Metric 3:
(post bubble)

VC
2.6%*

0%


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Metric 3:
(post bubble)

Consumer
adoption
7%

VC
2.6%*

0%


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Metric 3:
(post bubble)

Consumer Apple
adoption 400%
7%

VC
2.6%*

0%


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Metric 2:
Limited Partner narrowing conﬁdence

Some 80% of all
capital committed to
VC in 2011 went to
just 7 large funds

* Source: 2011 Ernst & Young

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Metric 1:
Public conﬁdence

Average last two year post-
Venture Style IPOs depressed
IPO performance -30%

Source: 2012 The Courtney Group Source: 2012 Capital Mind

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More highly
More Money
skilled people

+ +

Limited Partners Entrepreneurs

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More highly
More Money
skilled people

+ More opportunity
83% of world population un(der)-served
by technology and even 7% growth in adoption
+
during economic crisis

Limited Partners Entrepreneurs

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More highly
More Money
skilled people

+ More opportunity
83% of world population un(der)-served
by technology and even 7% growth in adoption
+
during economic crisis

Limited Partners
- years of
More than 10
Entrepreneurs

mediocre VC
performance
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Conclusion

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Not the concept,
our but

implementatio
n
of Venture Capital is
economically
incompatible
with needs of
groundbreaking
innovation.
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We need to ﬁx the economic
model under which Venture
Capital operates
if we want innovation and our

economy to perform

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Only economic change
leads to the discovery
of new outlier assets

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Question yourself

Limited Partner Venture Capitalist Entrepreneur
Why do you expect to
Why do you submit to a
generate outlier asset class Why do you expect prime
marketplace of innovation in
returns from 10 levels of returns from the deployment
which only your vision and
bottom heavy of subprime risk?
merit is challenged?
diversiﬁcation?

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Georges van Hoegaerden
+1 (646) 580 - 0740

Or contact us at:
venturecompany.com/contact

The State of Venture Capital [Reformatted]

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