Majority World Report 2013
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- Less than 10% of business ideas are started, and over half of venture capital investments are written off, yet the businesses that receive funding account for a large percentage of GDP and job growth. - There is a huge amount of capital available globally but it is often not allocated to more innovative, risky ideas due to a focus on low loss ratios. - While extreme risk (62% write-off rate for venture capital) may not be for everyone, embracing more risk could unlock greater rewards and there is a large area of risk between the 2% tolerated by banks and 62% level of venture capital where more capital could be invested.
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Majority World Report 2013
- 1. Majority World Report 2013 Risks & Rewards @cape Dublin Web Summit, 2013
- 2. Some home truths about business of innovation
- 3. 10k business ideas 1k firms started 100 VC funded 20 IPO 2 market leaders Nobel Prize in Economics 2006 Professor Edmund Phelps Less than 10% of business ideas even get started
- 4. 55% of US venture capital investments are written off 0 5 10 15 20 25 30 35 40 45 50 x<0.5 0.5<=x<1 x=1 1<x<2 2<=x<5 x>=5 % Cost % Value
- 5. 62% of EU investments are written off 0 10 20 30 40 50 60 x<0.5 0.5<=x<1 x=1 1<x<2 2<=x<5 x>=5 % Cost % Value
- 6. But the capital which survives, backs businesses accounting for 21% of US GDP….. 1978 1981 1987 1995 1995 1997 1999 1999 2005 and $1.4tn in new market value creating 440k new jobs with $545bn in new annual revenue serving >1bn customers Source: HIS Global Insight
- 7. And in Europe we are starting to build waves of similar dimensions
- 8. So are venture capitalists just bad at assessing risk or do they really understand innovation economics?
- 9. Aren’t accelerators just applying logic of venture economics even more aggressively….?
- 10. And marketplaces adding further scale to open up risk adjusted and scaleable funding to new sectors….. Creative & Consumer Electronics Startups Microfinance SMEs
- 11. We’ve had almost 60 years of evidence on how innovation economics can drive explosive social and economic value creation….. Semis Hardware Software Internet Mobile CloudNetworking Crowd
- 12. But can venture’s real legacy be a broader understanding and application of innovation economics?
- 13. Extreme risk of 62% write-offs is definitely not for everyone, including many entrepreneurs and venture investors….. .
- 14. In fact a 2% loss ratio for banks lending to SMEs is already pushing the boundaries.
- 15. But there is so much cash out there…. $266bn FTSE100 ($5k per UK citizen) $85tn global AUM ($12k per human)
- 16. Can’t we be more adventurous on how we allocate and manage it?
- 17. We know 7% of small companies create >50% of new jobs .
- 18. We know innovation creates priceless economic and political capital .
- 19. So given the evidence, shouldn’t we be prepared to risk more on radical innovation? .
- 20. Even in the US we are still falling short
- 21. Which is a shame, as radical risks create biggest rewards….
- 22. . There is a huge area between 2% and 62% loss, surely we can loosen our view of risk a little? 2% Corporate Finance 62% Venture Capital
- 23. Look at the facts again 0 10 20 30 40 50 60 x<0.5 0.5<=x<1 x=1 1<x<2 2<=x<5 x>=5 % Cost % Value
- 24. Power laws mean you have spectacular losses or wins 0 10 20 30 40 50 60 x<0.5 0.5<=x<1 x=1 1<x<2 2<=x<5 x>=5 % Cost % Value £10bn IT write off £200bn mkt cap
- 25. If you feel comfortable managing risk, you might as well shoot for the moon
- 26. And in Europe we have a generation with nothing to lose….
- 27. . But how can we expect people to embrace risk when large corporates, governments and educators won’t? 2% Corporate 62% Venture
- 28. We have grown up in cultures with relative excellence in health, education, security and political stability
- 29. But what skills have we developed to navigate this new chaotic and risky environment?
- 30. Almost none
- 31. Europe is ahead of US and Japan despite itself
- 33. 1.2bn can like
- 34. > 1bn can search
- 35. >500m can pay
- 36. >750m can Tweet, Skype, Whatsapp or Snapchat
- 37. But growth is somewhere else
- 38. And it’s a big world out there
- 39. So how we can get more value from $4tn we spend annually on educating and preparing people for their future 0 10 20 30 40 50 60 x<0.5 0.5<=x<1 x=1 1<x<2 2<=x<5 x>=5 % Cost % Value $570 per person ???
- 41. So how can you help yourself?
- 42. Learn to work on the network
- 43. Get out there and explore
- 44. No short cut to being a grandmaster “achievement is talent plus preparation.” - Malcolm Gladwell
- 45. Learn by doing
- 46. Use your time – do tasks
- 47. Use your expertise in almost any field you can imagine – curate, contribute, consult, teach
- 48. Use your talent – write, make music, take pictures, make movies, make stuff
- 49. Invest and share your major assets – savings, car, house
- 50. If you have something to offer there are now 3bn people connected to you – already 10x world’s most efficient market EVER
- 51. Some advice for your trip
- 52. You have to learn take risks Time Emotions Money
- 54. Self-awareness & honesty Intrinsic Motivation & social capital Determination & humility Creativity & ability to inspire ….. Are they lucky? Emotional intelligence You can never de-risk people element, so look for…
- 55. Take your losses as early and cheaply as you can and move on 0 10 20 30 40 50 60 x<0.5 0.5<=x<1 x=1 1<x<2 2<=x<5 x>=5 % Cost % Value
- 56. Impossible to know where success will come from Just try stuff out Be open, not closed Embrace the network – its your greatest untapped resource and now it can talk back Spread your risks Always reinvest some of your winnings
- 57. But if you find the wave and you know what you’re doing, you can climb the power curve, and win – spectacularly and globally
- 58. So aim too high. The prize is huge and we all have an amazing start just by being here
Editor's Notes
- A way of describing the odds: Edmund Phelps, a Columbia economics professor and Nobel laureate, described the odds in his new book, “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change” as “from 10,000 business ideas, as 1,000 firms are founded, 100 receive venture capital, 20 go on to raise capital in an initial public offering, and two become market leaders.”
- According to the venture impact study, IHS Global Insight, originally VC-backed companies accounted for 11.87m jobs and over $3.1 trn in revenue in the US in 2011—accounting for 21% of GDP and 11% of private-sector employment. At Index, our portfolio companies alone have generated $4bn worth of revenue, while growing on average by more than 75%, creating 20k jobs with 1k positions currently open People say VC doesn’t add anythign but maybe when we look back on this cambrian explosion of innovation from 1960s (semis) to 2020s (cloud connected services in every sector) – the broadscale application and understanding of venture economics will be the true legacy of venture rather than Apple, Cisco, Facebook, Google, Microsoft, Salesforce, Skype and Twitter DATA: https://docs.google.com/a/indexventures.com/spreadsheet/ccc?key=0ArWfM5OOjmKZdDJ4QWcwcHh5UFZSYm9KSENDRHBONWc&usp=drive_web#gid=0
- Seedcamp stats: 93 companies since 2007 - 83% start-ups raised capital $120m total raised 76 operational 6 acquired 11 closed 850 jobs created YC stats: 511 companies since 2005 Average value of a YC-financed start-up is $22.4m 37 start-ups have either sold for, or are now worth, more than $40m. If you take last two years of classes out of these numbers (given that it takes time for a company to grow), and you look at 300 companies in YC instead of 511, that means the odds of +$40m success are about 1 in 10. As of 2011, YC had 25 companies of 316 acquired. Of these, 5 exits for over $10 million, and the combined value of the top 21 companies was $4.7bn. TechStars stats: 256 companies since 2007 71% companies funded $400m raised 204 operational 24 acquired 28 failed - 1,882 jobs created Based on new realities: - Cost of company creation - cloud/SaaS, open source, platforms, Capital efficiency of scale up -> Global markets (talent, customers, finance) YC numbers in 2011: http://ycombinator.com/nums.html WAYRA stats: (297 start-ups, €9.7m total investment, 70% commercially trading)
- Kickstarter: $810m total dollars pledged 49,355 successfully funded projects 4.9m total backers 1.4m repeat backers 11.2m total pledges Funding Circle: £156m successful loans £39m principal repaid £113m loans outstanding, with 98.5% repayments coming in on time 5.8% average net return (before tax) 55k people in UK have joined to lend to businesses Angelist: $200m investments $186m through introductions $14m through direct “invest online” product 21k investors on platform 1,300 companies successfully raised funding
- US: A study by three students at Columbia business school looked at the expected rate of credit losses on banks’ loan portfolios and came up with a benchmark of sorts: For our sample (Q4:1996-Q2:2012), the average (median) ALLL is 1.54% (1.37%) of gross loans held for investment: (http://www4.gsb.columbia.edu/filemgr?&file_id=7221887). EUROPE: According to the IMF, the level of non-performing loans as a share of total loans made in 2012 in Europe, was quite high– around 6% in the EU27. EU SMEs rely heavily on banks for funding. Around 75% of corporate financing in the EU is obtained from banks, compared to about 30% in the US. The EU crisis has now highlighted that this is a huge vulnerability for SMEs in Europe. KR: European banking report: http://www.ebf-fbe.eu/uploads/FF2012.pdf) http://www.zyyne.com/zh5/100747#p=7
- Major corporates are hoarding cash– a more granular look at point you’re making. In fact, tech titans Apple, Microsoft, Google, Cisco (CSCO), Oracle (ORCL), Intel (INTC) and Big Pharma giants Pfizer (PFE), Merck (MRK), Johnson & Johnson (JNJ) and Amgen (AMGN) collectively have more than $435 billion in cash on their balance sheets. (Feb 2013, Fortune, http://buzz.money.cnn.com/2013/02/12/apple-cash/) FTSE 100 numbers: market cap: $2.7 trillion Revenues: $280 billion Staff: 6.5 million Cash on balance sheets: $266 billion IT budgets: 1-8%
- Kauffman report, 2012: Looking into its portfolio of nearly 100 VC funds, including what it says are some of the most notable and exclusive names (confidentiality agreements barred it from naming them), the foundation found that only 20 of them beat a public-market equivalent by more than 3% annually, and half of those started investing before 1995. “There are not enough strong VC investors with above-market returns to absorb even our limited investment capital,” the Kauffman Foundation concludes HBS research: Research by HBS which look at US venture returns from 2004-2010 says that about 75% of VC firms don’t return investors capital, based on data from 2,000 companies that received venture funding of at least $1m
- Kauffman report, 2012: Looking into its portfolio of nearly 100 VC funds, including what it says are some of the most notable and exclusive names (confidentiality agreements barred it from naming them), the foundation found that only 20 of them beat a public-market equivalent by more than 3% annually, and half of those started investing before 1995. “There are not enough strong VC investors with above-market returns to absorb even our limited investment capital,” the Kauffman Foundation concludes HBS research: Research by HBS which look at US venture returns from 2004-2010 says that about 75% of VC firms don’t return investors capital, based on data from 2,000 companies that received venture funding of at least $1m
- Kauffman report, 2012: Looking into its portfolio of nearly 100 VC funds, including what it says are some of the most notable and exclusive names (confidentiality agreements barred it from naming them), the foundation found that only 20 of them beat a public-market equivalent by more than 3% annually, and half of those started investing before 1995. “There are not enough strong VC investors with above-market returns to absorb even our limited investment capital,” the Kauffman Foundation concludes HBS research: Research by HBS which look at US venture returns from 2004-2010 says that about 75% of VC firms don’t return investors capital, based on data from 2,000 companies that received venture funding of at least $1m
- KR: A recent study by the Product Development and Management Association found that radical innovation accounted for only 10 percent of an average company’s innovation portfolio, down from 21 percent in 1990. As the new productivity measures gained traction, managers naturally gravitated to projects that succeeded under the new constraints. More and more, breakthrough projects with high failure rates and less predictability lost out when investment priorities were set. (BCG, Managing the Unmanageable: Radical Innovation, 2013) (KR has PDF from David Dean)
- Power laws are a fundamental departure from how we have come to understand the world. The fact that they will only show up more often means no matter what we do, we need to understand how they work and what causes them. http://en.wikipedia.org/wiki/Power_law
- iPhone Self-driving cars Health
- What did these governments spend in a year on DEFENSE, EDUCATION, HEALTH: See google doc for this data: https://docs.google.com/a/indexventures.com/spreadsheet/ccc?key=0ArWfM5OOjmKZdDJ4QWcwcHh5UFZSYm9KSENDRHBONWc&usp=drive_web#gid=1
- ORIGINAL STUDY…http://digitalcollections.library.cmu.edu/awweb/awarchive?type=file&item=44582 Forty years ago, in a paper in American Scientist, Herbert Simon and William Chase drew one of the most famous conclusions in the study of expertise: There are no instant experts in chess—certainly no instant masters or grandmasters. There appears not to be on record any case (including Bobby Fischer) where a person reached grandmaster level with less than about a decade's intense preoccupation with the game. We would estimate, very roughly, that a master has spent perhaps 10,000 to 50,000 hours staring at chess positions… KR: After Simon and Chase’s paper, for example, the psychologist John Hayes looked at seventy-six famous classical composers and found that, in almost every case, those composers did not create their greatest work until they had been composing for at least ten years.
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