todddagres:

Lately,  I’ve been hearing statements like: “the Venture Capital  market will never be the same”, “the good ole days of Venture Capital are gone” and “Venture is dead”.  I would expect these comments from bloggers seeking attention or journalists throwing out controversial headlines.  However, these words are coming from the mouths of Venture Capitalists.  Et tu Brute?  The VCs delivering these comments seem to have one thing in common- they are grumpy old VCs.   There are VCs that have been at the game for a long time.  They made lots of money before the bubble burst in 2001.  They now find themselves in a global recession.  The IPO market is moribund.  The M&A market is depressed.  The 10 year VC returns are lousy with nearly 2/3 of funds raised over the last 10 years under water.   LPs have allocation and liquidity issues making fundraising much tougher.  Venture-backed companies are going under.  Established VCs have portfolios laden with struggling little companies.  They don’t see any imminent liquidity.  Several of their funds are probably not going to generate Carry (the percentage of the profits retained by VCs after returning invested capital).  They now have to deal with younger Partners that didn’t make money in the last bubble and are clamoring for better economics.  There is little or no wining and dining by investment banks and lenders.  In short, the business is not as fun as it was 10 years ago, or even 3 years ago.

So why shouldn’t we conclude that Venture is dead?  Because we don’t steer using the rear view mirror.  The financial markets and Venture Capital results are cyclical.  They always have been and they always will be.  Over the last 40 years the VC market has been highly correlated to the financial markets.  Is there data to show that the correlation is no longer true?  I think not.  When the NASDAQ rises again, the VC market will follow.   As for the business of Venture, are there not still opportunities to build great companies based on innovative new technologies?  Are there not talented entrepreneurs seeking to start companies?  Consider the combined opportunities in the Information Technology, Media, Life Sciences, and Energy Industries.  The potential value to be built in these Industries is enormous.  Let’s not confuse a snapshot of the current financial markets with the future potential of the Venture business.  The VC market will rebound and the people with the energy and passion for the business will reap the rewards.  In the meantime, Venture will undergo a generational shift.  The shift is underway as fewer firms with fewer GPs raise fewer dollars and back fewer companies.  This is part of the cycle.  It isn’t the fun part of the cycle but it is normal.

The future may be cloudy but it’s not totally unpredictable.  There will be VC-backed IPOs and attractive M&A transactions.  When?  I’m not sure but I am confident that it will happen in the next five years.  Five years may seem like a long time but Venture is a long term business.  My guess is that some VCs won’t want to wait that long.  There are those that don’t have to keep slugging it out.  They have F-you money.  If they don’t like the way things are going they can check out.  They can leave like MacArthur did- just fade away.  But as they fade away, I pray that they continue to proclaim the death of Venture.  And I hope people listen.   It would be great if the money flow slows even further.  It would be lovely if the Venture industry continues to contract in terms of firms, people and money.   The good times will be even better with fewer VCs funding competitive deals.

So I say thanks to the grumpy old VCs.  Thanks for spreading the word that Venture is over.  Just don’t mind me continuing to beat this dead horse.  And don’t tell anyone that the dead horse isn’t really dead, but rather, resting in preparation for the next derby.

td