Trends in the Venture Capital Industry


Published on

The third of three lectures given at Brandeis University by Evangelos Simoudis.

Published in: Economy & Finance, Business
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide
  • … scalability is crucial, and companies should be open to any forms of mergers (both buying and selling) for start-up tech financing must change, as most won’t require more than $2 million (despite larger and larger funds)… 10x cheaper to start an Internet business now than in 1999 Operations: decrease engineering headcount, determine the absolutely necessary product features, cut lagging marketing, create accountability for sales (commissions), encourage realism on pipeline, cut underperforming departments, defer payments – MOVE FAST For CEOs – raise necessary funding as soon as possible, aggressively pursue M&A for critical mass, be realistic on valuations, understand that VCs have the negotiating leverage
  • Venture industry doomed by an overinflated sense of self (i.e. the industry is critical to entrepreneurship). In fact, the opposite is true as only 0.2% of the estimated 600K businesses created in the U.S. each year obtain venture financing
  • , with $100+ million raises nearly out of the question as the fundraising model for capital-intensive businesses is broken, even among clean-tech businesses (which now favors smaller asset models such as energy monitoring) Even if there is a shift towards lower-cost Web 2.0 startups, these do not have the same kind economic/macro productivity impact as their tech bubble predecessors … need a catalyst to jump-start, particularly among VC-backed companies: federal encouragement, bigger VC bets, more focus on R&D (BEFORE it becomes mainstream) rather than mindlessly following the herd… Money continues to flow into software and infrastructure designed to outsource hardware and IT from enterprises (“cloud”) The iPhone/Blackberry smartphone revolution continues to produce mobile content at an exponential pace… but investors remain cautious of ad-based businesses… “content is over-invested, but hardware is under-hyped” As healthcare remains in the public spotlight, there still remains opportunity to revolutionize the industry through technology… recent examples include streamlining bank/insurance processes for health paymen
  • Trends in the Venture Capital Industry

    1. 1. Trends in the Venture Capital Industry Evangelos Simoudis, Ph.D. Managing Director Trident Capital [email_address] Blog: Twitter: @esimoudis
    2. 2. Conclusions from the last 12 months <ul><li>Companies survived because of cost-cutting, evaluating customer quality and risk, reducing debt, and slowing down new initiatives </li></ul><ul><ul><li>Stronger management teams were quicker to react </li></ul></ul><ul><li>Some business models, e.g., SaaS, proved strong and (well-capitalized) companies extended their lead over their competitors </li></ul><ul><ul><li>Dramatic set back for some business plans, e.g., ad-supported content </li></ul></ul><ul><ul><li>58% of investors expect increasing bankruptcies </li></ul></ul>
    3. 3. Conclusions from the last 12 months (cont.) <ul><li>New financings became harder (flat became the new up) </li></ul><ul><ul><li>Write down value of portfolio </li></ul></ul><ul><ul><li>Many inside rounds (30% of investments) </li></ul></ul><ul><ul><ul><li>Funds running out of cash </li></ul></ul></ul><ul><li>VCs realized that they may need to hold existing investments longer (by as many as 2-3 years) </li></ul><ul><ul><li>Fewer distributions to LPs </li></ul></ul><ul><ul><li>Fewer new investments </li></ul></ul>
    4. 4. Startup financing environment <ul><li>Less money is being invested ($28B invested in 2008, $21B in 2009) </li></ul><ul><li>B/C round valuations have decreased. Terms are more investor-friendly </li></ul><ul><li>Series A valuations remained flat </li></ul><ul><ul><li>The talent is not located at the most cost efficient locations </li></ul></ul><ul><li>2,000 VC-backed companies will need new money in the next year. Few will get it </li></ul><ul><ul><li>Startups continue to burn more than planned (increased capital efficiency for technology creation but market expansion is getting more expensive) </li></ul></ul><ul><li>Keys for attracting investment: must-have product, established revenue model, understanding the market uptake, strong customer ability to pay, competitive positioning, credible path to profitability </li></ul>
    5. 5. Startup financing environment (cont.) <ul><li>VCs are becoming more demanding (tranched investments, focus on capital efficiency) </li></ul><ul><li>VCs are becoming risk averse. Impact on innovation? </li></ul><ul><ul><li>Is the US still the best place to fund and benefit from tech innovation? Venture is declining as a % of GDP: 0.1% (’09-’14) vs. 0.8% in (’99-’00) </li></ul></ul><ul><li>Recent and planned IPOs and acquisitions will open up the VCs’ appetite </li></ul>
    6. 6. The VC industry is being resized <ul><li>Weak returns are the result of too many VCs chasing few good deals and not enough exits </li></ul><ul><ul><li>Every sector is over-funded ($12B/year was invested in mid-90s vs. $28B invested in 2008, $21B in 2009) </li></ul></ul><ul><ul><li>2008 through 3Q09 was the weakest IPO period in venture’s history. IPOs are necessary to the venture industry because of the returns </li></ul></ul><ul><ul><li>Regulations make public ownership now more difficult than ever </li></ul></ul><ul><ul><li>Industry consolidation left fewer acquirers to drive M&A but the remaining ones have cash </li></ul></ul><ul><li>VCs still holding too many illiquid and wrongly-priced investments </li></ul><ul><ul><li>Struggling VC try unloading their investments at deep discounts. This trend will continue and even accelerate </li></ul></ul>
    7. 7. The VC industry is being resized <ul><li>VCs now pay even more attention to Asia (China, India) </li></ul><ul><ul><li>More fundamental innovation taking place overseas </li></ul></ul><ul><ul><li>Can US VCs be competitive abroad? </li></ul></ul><ul><ul><li>What can American VCs offer to Asian entrepreneurs? </li></ul></ul><ul><ul><li>Will the Indian and Chinese governments want to control how local companies are financed? </li></ul></ul><ul><li>The strong VCs will survive and get stronger; the rest will disappear </li></ul><ul><ul><li>Top-quartile VCs are raising (or have raised) new funds to take advantage of the opportunity </li></ul></ul>
    8. 8. VCs must find the next high growth markets <ul><li>Funds now more risk-averse than during the tech boom </li></ul><ul><li>Innovation has been lacking across the tech industry </li></ul><ul><li>Many smaller tech companies are too focused on short-term exit strategy than company building </li></ul><ul><li>Look for the next big industry to drive future growth. VCs must be long-term right, not short-term right </li></ul><ul><ul><li>Cleantech is promising, but has bubble potential </li></ul></ul><ul><ul><li>Don’t look for the next Facebook lookalike but the next Facebook-type opportunity </li></ul></ul>
    9. 9. The technology trends we follow today <ul><li>The transition from offline to online in commerce and media consumption </li></ul><ul><li>The transition from on-premise to on-demand/cloud software </li></ul><ul><li>The corporate desire to use the data they generate or have access to including big data in the cloud </li></ul><ul><li>The increasing use of smartphones; smartphones as computing, communication and entertainment platforms </li></ul><ul><li>The need for smarter use of energy; move to clean energy </li></ul><ul><li>The need for IT-driven automation in healthcare </li></ul><ul><li>Cyber security </li></ul>
    10. 10. In the future you should expect … <ul><li>Fewer US-based VCs </li></ul><ul><li>Fewer US-based VC-backed companies </li></ul><ul><li>More foreign investment opportunities </li></ul>