Category: capital
February 8, 2021 Institutional Investor : What Investors Lose in an Undeveloped Secondary Market
Using Oxford Economics’ macroeconomic forecasts, the paper’s authors argued, for example, that investors should be cautious about their current allocations to venture capital as the sector is flush with capital and competition for deals has pushed valuations to near records. Assuming that the economy remains in a rut for the next five years — Oxford’s baseline economic forecast — the researchers projected lower expected returns relative to history in private equity and private debt. They said that private debt will still be an important source of diversification, because those assets outperform similar public credit instruments. The researchers also expect natural resource and real estate funds to outperform in the next few years. (read more…)
CATEGORY: capital, secondaries
February 5, 2021 Semil Shah via Twitter : 2021 Venture Capital Market Dislocation – “WTF Is Going On?”
Adam Nash tweeted this earlier, paraphrased: "The VC industry went from looking for $1 billion-dollar outcomes to $10 billion-dollar outcomes to $100 billion-dollar outcomes in less than 24 months. This end-market acceleration has occurred during a time of zero-interest rates (not being touched until 2023, per Fed), high IPO liquidity, huge chip stacks at various VC funds, and making investments via Zoom. Investing in technology feels like the only game in town now in a pandemic world. Public investors are now full in privates; growth investors are doing As and Bs like they're seeds; traditional VC firms are straddling seed and Series A (tho many have multi-stage arms); and seed investors, angels, rolling funds, syndicates, accelerators are conducting massive experimentation to unearth the next great thin. (read more…)
CATEGORY: capital, risk, VC, winner take all
January 13, 2021 Pitchbook : PitchBook-NVCA Venture Monitor Q4 2020 Report
At the outset of the pandemic, many thought the US venture industry was staring down a major decline, but 2020 actually ended with new records in dealmaking, exit value, and fundraising. Investors and LPs remained active, and tech-enabled industries rode tailwinds created by the pandemic-forced unlocationing of business, education and healthcare. 2020 top-line figures of the US VC industry are staggering: $156.2 billion invested, $290.1 billion exited, and $73.6 billion raised by VC funds. These record figures should set the industry up for continued strength moving into 2021. (read more…)
December 21, 2020 Pitchbook : The year in charts: VC defies 2020 expectations despite the pandemic
VC dealmaking in the US remained incredibly resilient in 2020, with companies raising nearly $148 billion as of Dec. 14, according to PitchBook data—already a decade high. The total number of VC deals this year, however, dipped from a high achieved in 2019. Much of that funding activity can be attributed to the fat checks investors wrote for their existing, later-stage portfolio companies better suited to survive the worst of the pandemic. That didn't bode well for early-stage investments, which have dropped off significantly this year. (read more…)
CATEGORY: capital, VC, winner take all
December 1, 2020 National Bureau of Economic Research : Hidden in Plain Sight: Venture Growth with or without Venture Capital
In our matched sample estimates, VC funded firms are 6 times more likely to grow than non-VC-funded firms of comparable quality. Furthermore, when we focus on the right tail of the estimated VC Likelihood distribution, the ‘VC-effect’ is substantially reduced: firms in the top 0.05% of our quality measure at birth, are only 2.3 times more likely to grow with VC funding than without it. (read more…)
September 30, 2020 Harvard Business Review : What’s Next for Silicon Valley?
Over the last 20 years, Silicon Valley has benefited from a once-in-a-lifetime alignment of advantages. American primacy, the ubiquity of cheap capital, the arrival of the smartphone (among other widely adopted tech innovations), and, perhaps most significantly, a benign regulatory environment have all conspired to create a historic concentration of wealth and power. The titans of the Valley and their heirs have been free to roam far ahead of lawmakers, watchdogs, and tax codes. That might not be true for much longer, however. Despite the fact that many public tech companies saw their valuations skyrocket during the lockdown and that the Covid-19 pandemic has accelerated mass adoption in e-commerce, online payments, telemedicine, and video conferencing, there are signs that the gilded age for consumer internet businesses may be drawing to a close. (read more…)
August 4, 2020 Morgan Stanley : Public to Private Equity in the United States: A Long-Term Look
The dispersion between the best and worst funds is very high in venture capital relative to other asset classes (see exhibit 43). As we reviewed earlier, median returns to investors have been lackluster since 2000, but this hides the fact that top performing funds have generated very good returns. Identifying which funds are in the top quartile can be tricky. Indeed, more than one-quarter of all funds claim to be in the top quartile. The reason is that there are different ways to measure results, including various benchmarks, performance measures, and data sources. Outlook. The outlook for returns from U.S. venture capital in the aggregate, given investor commitments and fund investments, appears to be consistent with the recent past. The dispersion of returns within the asset class suggests that investors who have access to top tier funds will continue to earn very attractve returns. It also stands to reason that the large swell of investment in late-stage venture will earn lower returns than the smaller sum invested in early stage. (read more…)
August 3, 2020 The Hill : Revaluing venture capital
One of the strategies to address this issue has been to create “carve outs” or small allocations from big funds to invest in diverse fund manager and entrepreneurs. Institutions like Goldman Sachs have done just that. There are a few challenges with this model. First, most institutions have criteria that does not allow them to invest in first-time fund managers. In a world where only 14 percent of investment managers are female, with a significantly smaller number having run a fund before, how can we possibly widen the pool? Layered on top of this challenge is the financial burden it takes to get a fund up and running. Many managers have to forgo salary for at least a year while they are fundraising (and those are the lucky ones who even raise a fund). Very few women and minorities have this kind of capital cushion. In addition, fund managers have to commit 1 percent of the total fund size. So, if I raise a $50 million fund, I have to put in $500,000 of my own money. Potential investors base their diligence on how much “skin in the game” the managers have committed. I don’t have that kind of money, and I know many others in my position don’t either. These are meaningful technical issues that can and need to be addressed. But those technical issues are not the biggest hurdle. Women and minorities think differently; they run companies differently; they communicate differently, and they see opportunity in different places. In short, you can’t just put a woman or minority in the position and expect her to act like the traditional male investor or entrepreneur. To change the diversity of the industry we must be willing to embrace divergent cultural styles, different ways of communicating, and new ways of assessing market opportunities. (read more…)
CATEGORY: capital, leadership, VC
July 24, 2020 Josh Lerner and Ramana Nanda, Harvard Business School : Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn
Just how large a temptation the venture capital compensation scheme can pose is illustrated in the work of Metrick and Yasuda (2010), who show that of every $100 invested by the limited partners, over $23 end up in the pockets of the venture investors. These sums might not be disturbing if the very substantial payouts to each partner reflected even larger returns being made by the limited partners in the fund. But profit-sharing is not the most important source of compensation. Instead, almost two-thirds of the income (in time-adjusted dollars) is coming from the venture capital management fees, which remain fixed whether the fund does well or poorly. These incentives clearly may motivate groups to add capital in excess of the growth of partners, even if performance suffers somewhat. (read more…)
May 18, 2020 The Verge : A pizzeria owner made money buying his own $24 pizzas from DoorDash for $16
The answer isn’t clear because we’re very far from the old ways. By the magic of venture capital, some businesses don’t have to make money to survive. And that’s upended things for everyone. “Third-party delivery platforms, as they’ve been built, just seem like the wrong model, but instead of testing, failing, and evolving, they’ve been subsidized into market dominance,” as Roy puts it. “The more I learn about food delivery platforms, as they exist today, I wonder if we’ve managed to watch an entire industry evolve artificially and incorrectly.” (read more…)
CATEGORY: capital, profitability, VC