The NYT has an article on how LPs are unhappy with US VCs – most of them, anyway – and has some interesting bits to it.
Some limited partners, whose billions of dollars help fund the investments made by venture capitalists and who pay their fetching salaries, are unhappy. They say the industry is far less healthy than it advertises and that but for the most successful venture firms, it is struggling.
Chief among the troubles, they say, is the little publicized but continuing fallout from the dot-com bust coupled with a public market that is wary of embracing technology start-ups.
The complaints took on an unusually public flavor last month at the National Venture Capital Association trade meeting, an otherwise chummy affair in Washington. At the meeting, a handful of experienced limited partners gave a pointed presentation to a room of several hundred top V.C.’s.
Most directly, some said that venture capitalists on the whole have not made meaningful payouts for years to their limited partners.
“It’s been almost a decade,” said Eric Doppstadt, director of private equity for the Ford Foundation, which invests in venture capital firms. “I find it shocking that an asset class that has provided so little payback continues to attract so much capital.”
Of course, the VCs weren’t going to take that one lying down:
Mark G. Heesen, the president of the National Venture Capital Association, countered that the views stand at odds with the growing sums that limited partners continue to push at venture capitalists.
“Limited partners may have their complaints, but the demand for participation in the venture capital asset class remains extremely high,” Mr. Heesen said. “This is a high-risk, high-reward game — not only for the venture capitalists but for their investors as well.”
This graphic gives some data to help make your own mind up.
- Mary Meeker’s 2014 Internet Trends report - May 28, 2014
- Andreessen-Horowitz raises $1.5B for its new fund - February 1, 2012
- WestBridge launches India “evergreen” fund - November 15, 2011
This article provides a peek at a problem that the VC industry is typically very good at brushing under the carpet — that there is tremendous variation among VC performance. IMO most of it can be traced to investment evaluation and venture nurturing styles of VC individuals (and not to external events).
Maybe this is the reason the VCs show so much of herd mentality when running after hot sectors. They perhaps want to de-emphasize their individual performance and make a bigger deal out of the sectoral charcteristics that impact venture success.
The answer for what the LP should do is hidden in the data. VCs are typically paid 2 and 20. If the fund I am funding is not close to the top 25% VCs in terms of performance, I should negotiate it downwards.
The bottom 25% performing VCs should be abandoned from the VC business altogether (follow Jack Welch!). They should get no new funds from anyone, EVER! If you think this is ridiculous, ask the hundreds of mutual funds and hedge funds globally who had to shut down after performing poorly.
And finally, if the LP is funding a rookie VC fund (as most funds and VCs in India are), they should give nothing close to 2 and 20.
Remember, Warrent Buffett is still paying himself just $100K in salary after 5 decades of stellar performance beating the market.
Well, reasons for these depressed returns are basically:
a. More funds being raised
b. Fund sizes getting larger
c. Capital requirements for starting up getting smaller (blame low h/w, bandwidth costs, open source s/w and outsourcing), which means lesser avenues to deploy these funds.
Triple whammy effect leading to a squeeze on the VC industry from both ends. Plan to cover some of those issues on my own blog (for those interested).
In the US I hear that there is lot of interest in seeding startups not to create elephants but to create companies that can get acquired. It is a more mature market where a number of the elepants have been built and these elephants want to grow by acquiring startups.
This apart from what RYK mentioned is creating problems for large VC’s.
In India I do believe that some elephants can and will be built. There will be more Naukri’s, Educomp’s ,Indiabulls, Financial Technologies etc.
I think Peter Ripp, Blog EarlyStageVC has highlighted this 6 – 8 months back…the big debate on his blog was as to why is the VC model broken… from what I recall, it was to do with the fact that the VCs had very large funds and were thus forced to only make investments that required atleast $10M, and thus that forced up valuations, creating all kinds of complications for exit:
http://earlystagevc.typepad.com/earlystagevc/2006/01/traditional_ven_3.html
Is there similar data on the Indian VCs and the scenario here? Tried googling but couldn’t find much ..