Venture Capital’s Math Problem

Here’s a must-read article from Fred Wilson on Venture Capital’s math problem (and here’s a follow-up). He talks of the inability of VC to scale (I think the same can be argued for any segment of Private Equity) and the fact that too much money has poured into the asset class. Given the fact that between $20-$30 billion has been coming into the industry a year would require $150 billion a year in exits, while in reality only $100 billion is being achieved. 

This isn’t news to many, as LPs have been growing increasingly displeased with the results they’ve been getting from Venture Capital as an asset class overall. Taken one step further, these excess funds to VC has also meant that many funds exist that shouldn’t and that there are many people in the business that shouldn’t be (again, I believe this to be true of all segments of Private Equity). Now, this isn’t a debate on the virtues and benefits of having more money for VCs to invest in growing companies, this is about the viability of the industry as an asset class.

Further, for those you who may say that VCs having extra billions to spend (Hello, Tom Friedman!) will only help entrepreneurs get easier access to funding, I would say that not every start-up/growing company is appropriate for being venture-backed and enabling second or third-tier VCs to keep on going won’t be all that beneficial in the long-run. I know of good start-ups that got ruined by VCs that should never have been in the business, but ended up getting funded because, well, at the time just about anyone claiming to be a VC could get funding. 

I’m passionate about Venture Capital and the benefits it’s provides, not only to the economy but to investors as well, and hopefully it wakes up to the idea that bigger in this case may not necessarily be better.

Tech M&A Activity Falling Like a Rock

Jeffries just released a report on mergers and acquisitions activity in the tech sector for Q1 2009, and there are some green shoots signs that things may be bottoming out…maybe…hopefully…keep your fingers crossed.

While the number of tech deals in North America fell to a five-year low, it was only a 4% drop compared to the previous quarter. That neglible downtick is a lot easier to swallow than the 23% nose-dive that happened between Q3 2008 and Q4 2008. Q1 ‘09 aggregate value for tech M&A in North America came in at $4.3 billion, again a 4% fall from the previous period (but an 85% kamikaze dive from Q1 2008). The first quarter of this year saw three tech deals valued at more than $500 million, which is down from 10 in first quarter of 2008.

Over here in “old” Europe, aggregate tech M&A value came in at $1.8 billion for Q1 2009, an 80%(!) decline from the previous quarter. However, despite that step off the techie deal cliff, it’s interesting to note that the proportion of sectors that saw deals has stayed rather constant with IT services deals hovering around 30% of total transactions for the past five quarters, and digital media M&A ranging from 32%-35% of total deals in that same period.

Based on these first quarter results, Jefferies is forecasting fewer than 1,500 deals this year in North America, a decline of 22% versus 2008, which saw 1,919 deals. In terms of aggregate value, the bank is expecting only $17.2 billion, a 79% drop from last year, and a far, sad cry from 2007, when the total deals announced were collectively worth (stop reading now if you have a weak heart) $191 billion.

And since we’re on the topic of Jeffries, here’s a recent presentation of their’s on TMT in Q1 2009. They’re seeing some signs of “cautious optimism” and have a nice section looking at IPOs and PIPEs:

And here’s a graph, albeit not one with the cleanest graphics, showing the tech M&A transaction trends:

 

 

Videos From the Milken Institute Global Conference

From the always readable InfectiousGreed, here’s a video of Vinod Khosla being interviewed by Elizabeth Corcoran on the topic of the shift to renewable energy.

Next up is a video featuring a panel of feisty institutional investors (yup, feisty LPs!).  Worth watching.

Both discussions took place at this year’s Milken Institute Global Conference.

NVCA’s 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry

The NVCA has just released a four-pillared plan to help revive the venture-backed IPO market.  Their argument is that the cause of the current dearth in companies going public lies beyond the severe economic downturn, and that certain systematic issues (such as Sarbanes-Oxley, the Spitzer Decree, etc.) are playing a larger role in creating these doldrums.  In reality though, I think it’s a combination of the two. While yes, they’re right in pointing out regulatory problems, one can’t overlook the simple fact that a severe recession is bad for a company looking to IPO.  

The plan brings up some excellent points and I particularly liked their emphasis on the VC “ecosystem”. Many of the boutique’s present in the 1990’s have disappeared and the playing field of advisory services is more homogeneous than before. The under $50 million IPO has become a rarity (though I think this has just as much to do with some VCs trying to hold off for a bigger payday as it does with large I-Banks and a lack of small-cap sellside analysts), and I was surprised that law firms weren’t touched on. Of all the advisory costs for small companies, legal fees are the ones that have risen the most over the past ten years.  I also think that the new private market platforms (such as InsideVenture, SecondMarket, etc.) will be an interesting space to watch develop over the next few years.

Anyway, here’s the presentation.

And the press release:

• NVCA Makes Recommendations to Address Capital Markets Crisis

NVCA President Mark Heesen In Pre-Annual Meeting Talk

NVCA president Mark Heesen talking about concerns of the Venture Capital community before the association’s annual meeting. I think by now most people familiar with VC know the woes the business is having at the moment (only seven venture-backed IPOs in the last five quarters, a five-year low for fundraising, a twelve-year low for investing), but Mark also brings up regulatory issues and makes an excellent point at the end about the impact that the secondary markets are having on VC.

Venture Capital Term Sheet Generator from Wilson Sonsini

Here’s a cool new tool from law firm Wilson Sonsini Goodrich & Rosati:

• WSGR Term Sheet Generator

Very simple to use and, as Jason Mendelson points out, even their own lawyers use it!  

Dom DeChiara of Nixon Peabody on Current Seller Expectations

Here’s a very good interview of Dominick DeChiara, head of the private equity group at Nixon Peabody LLP, running through the current state of seller’s expectations. Covers everything from lower prices, to current deal multiples, to financing outs, as well as the trend for more flexible material adverse change clauses. Quite comprehensive for under four minutes!

Preqin’s Q1 2009 Private Equity Spotlight Report

Preqin has just released the latest issue of it’s Private Equity Spotlight report. As always they do a very good job looking at the current state of fundraising. While they point out the dire state of funds looking to raise money, based on their polling of LPs, they predict that Q1 of this year will have been the low-point in fundraising. The report also has features on Sovereign Wealth Funds, and French funds (Preqin estimates that French funds have over €40 billion in available capital at the moment. Interesting).  

Anyway, you can read all that for yourself:

•  Preqin’s Private Equity Spotlight – April, 2009

HEC Private Equity Alumni Networking Event News Article

Happy to announce that the upcoming issue of Hommes et Commerce will feature an article concerning the 1st HEC Private Equity Alumni Networking Event that took place on March 23rd. Thanks go out to Patrick Lissague, Managing Director of UFG Private Equity and President of the BACI Group within HEC’s Alumni Association; to Christophe Raynaud, Fund Manager at ISAI who documented the event, to Dan Sipple-Asher, who took over the Presidency of the HEC Private Equity Club from me and who made sure the student involvement was strong; to UFG Private Equity for their financial support of the event; and to all the alumni who came and made the evening such a success.  Thanks again!

• HEC Private Equity Alumni Networking Event Article in Hommes et Commerce (in French)

Venture Capital: So Easy, Even 5th Graders Can Understand It

Here’s a great presentation that one of the guys at DFJ Gotham Ventures (Danny Schultz) gave to his son’s 5th grade class in order to explain venture capital. It could probably help some business school students understand the world of VC as well!