From Dan Primack this morning, these factoids:
"More than half of venture capitalists (52.9%) believe that their industry is “broken,” according to a survey conducted by executive search firm Polachi Inc. Moreover, nearly 60% said that they are less confident in the VC industry today than they were six months ago."
You can read the full report here.
The Industry Isn’t Broken
VC isn’t broken. In fact, I would argue that there’s never been a more exciting time to be involved in venture capital. I’m highly optimistic. (Mind you that I’m a software / IT guy, so I’ll leave the cleantech and biotech opinions to others).
What’s not to like these days?
1. It’s never been cheaper to start a business with the advent of cloud computing resources, open source development environments and specifically today, low rents and the ease of hiring quality people;
2. Because of past successes, this country (as well as the rest of the world) is producing a lot of entrepreneurs. Today, more than ever, our college graduates are creating their own opportunities, not just working for the incumbents. These folks are scratching their own itches and creating companies of value (see everything from Facebook to Techstars);
3. We have more experienced entrepreneurs ever to fund. Given the maturity of the industry, it’s much easier to find folks who’ve "been there, done that." And with point 2, above, there has never been better deal flow and cool stuff to invest in;
4. VC is not a slave to credit markets or other systemic risks like other areas of finance. While the popular press has dramatized that investors are defaulting on the VC commitments, I’ve spoken to many folks who think this reporting greatly overstates the issue;
5. While the report says that nearly 70% of VCs are worried about their investor syndicate, this is something that should be in control of the individual VCs. I understand that some VCs syndicate for extra brainpower around the board table (a good thing), but many VCs syndicate simply to validate their investment thinking. This lemming approach isn’t good in its own right, therefore I don’t have a lot of sympathy for folks worried about it now;
6. We learned (or should have learned) a tremendous amount during the Internet bust period (2001-2004). The VC industry essentially got a "free pass" and instead of just being thankful, we should have learned a lot of valuable lessons about building Internet and software businesses. In short, we know how the next generation of companies should create value; and
7. Broadband, mobile connectivity and attention from advertisers exists today in ways that we envisioned 10 years ago, but finally is reality.
The Industry Shouldn’t Analyze Itself in the Short Run
The report says that the past 6 months has deteriorated VC confidence. What? With all due respect to John Maynard Keynes (who said "in the long run we are all dead"), who gives a shit about 6months? We are talking about an asset class in which each fund has a 10-12 year life span. We are also talking about an industry that has proved its best returns are usually made on companies invested into during a down economic cycle. Why shouldn’t we be excited about today? If history does repeat itself, we could look back one day as this time period being one of the best for investment.
In short, if you are making decisions in VC based on trends and noise in a 6 month time period, you are in the wrong industry. We need to be patient. You can’t rush success and you can’t bet on "what might be" 6 months from now.
Alright, all you haters out there are probably saying "none of this matters Mendelson unless we have an exit market." And yes, clearly, we need to have a vibrant exit market for us to achieve our financial return goals.
That being said, I speak to bankers on regular basis who think we are on the cusp of a wave of M&A. They are on the front lines and one of them (who is normally the most pessimistic dude that I know) is practically giddy.
On the IPO front, it’s bleak, but we’ve seen a few companies get out and folks like the NVCA are putting their weight behind plans to restore liquidity in the industry.
Unless you believe the entire U.S. economy is game over permanently, these markets will come back and they will allow us to meet our financial objectives.
So, there you have it – why more than half of VCs (surveyed) are confused/deluded/misinformed, if indeed, this presentation accurately represents their views that the industry is broken. It’s not. Invest in good companies with great entrepreneurs, stay patient, make our your investment decisions and the rest will take care of itself. And if they still don’t like it, I’m happy to have less of them around – it certainly won’t hurt my business.
*** I’ve had several comments about the VC industry being broken given that it got too big and raised too much money. I don’t think this is a fact of a broken industry, rather this is a situation that will be corrected. The industry will settle into a steady state. This is a bad fact, but doesn’t mean the industry is broken. ***