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TheFunded - Canarie

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TheFunded.com presentation on the state of venture capital delivered to Harvard Business School faculty in October 2008. See: <a href="http://www.altgate.com/blog/2008/11/venture-capital-is-broken.html">here</a>.

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The Canarie is Dead Something is Wrong in Venture Capital -Q3 2008-
The Lofty Goals of Venture Capital Economic Development “fund growing companies” Technology Development “in innovative technology sectors” Shareholder Returns “that generate significant shareholder returns” These are all positive goals, but are they being achieved?
Face the Gritty Reality of Operations Successful business people raise or join a VC firm Leverage regional and experience networks Fund top companies within their networks Support the companies with their experience Successful business people often tire of the VC model The relevancy of networks diminishes over time Top companies often come from “outsiders” Relevant experience is highly situational Theory Flaw
In a Model of “One Hit Wonders” “ The story told by Bon French, CEO of Adams Street [a fund of funds] , is that a full 5-points of the 20-points of return over that 20-year period is attributable to a single company exit within a single VC firm portfolio: Benchmark Capital's investment in eBay.” SOURCE: Startup Conversations VC Blog, April 2008 Investing billions over 20 years boils down to getting one hit?
The Presentation Thesis Venture Capital is Broken True Innovation is Undercapitalized The Inflection Point has Arrived It’s Time for Change
1. Venture Capital is Broken Money does not flow where needed <10% of companies that require capital get funded The fundraising process hurts momentum Complicated, time consuming, distracting The VC industry does not generate returns Just 13% of VC companies exit in recent NVCA data Hundreds of VC firms have funds that return nothing
Let’s Fund our Friends companies in VC networks meet strict VC guidelines other companies that need capital unfunded funded <10% SOURCE: TheFunded.com Membership Applications Google and eBay are in the small number of “other” deals.
So our Friends can save Us How many of these M&A buyers were also VC backed? “ Will you buy my other company, please… at a premium?” SOURCE: NVCA / Thompson Reuters Exit Poll M&A IPO M&A IPO Similar number of M&A deals, yet the prices skyrocketed.
When the Going gets Tough… 2008 YTD IPO valuations are one third less than in 1998. SOURCE: NVCA / PwC MoneyTree Reports
2. True Innovation is Undercapitalized VC investments are highly concentrated 6 of 17 industries receive >73% of investment “Me too” company investments are common Sectors are selected with inexperience Example: $ Billions invested into biofuels Investments have unrealistic expectations > $100 MM in annual revenue targets Ignoring advances and “foundation technologies”
Not a lot of Portfolio Diversity Q3 2008 Investment by Sector Software Biotechnology Industrial/Energy Medical Devices and Equipment Media and Entertainment IT Services Semiconductors Telecommunications Business Products and Services Networking and Equipment Consumer Products and Services Financial Services Electronics/Instrumentation Computers and Peripherals Healthcare Services Retailing/Distribution Other SOURCE: NVCA / PwC MoneyTree Reports Where is Material Sciences? How many of these are really just Web 2.0 deals?
3. The Inflection Point is Here Second downturn in eight years Returns never recovered from peak highs The same VC firms are getting funded < 50 new VC firms get funded per year The outlook for VC returns is worsening
A Line has been Crossed Fundraising Exits SOURCE: NVCA / Thompson Reuters Exit Poll SOURCE: NVCA / Thompson Reuters VC Fundraising Q3 Is more money going into the VC model than coming out? Blue is the total economic value created by VCs. Green is the total amount of money raised by VCs.
and Nothing Changed… SOURCE: NVCA / Thompson Reuters VC Fundraising Q3 1 new VC firm is funded for every 4 existing firms funded. How many “new” firms are started by existing VCs? New Funds Follow-on into existing Funds
4. It’s Time for Change Less Funds + Better Funds LPs scrutinize VC investments LPs invest more money into better VC firms Target: 1,000 great VC firms versus >4,800 today More Deals + Equal Treatment Structured and published investment process Stage-specific investors Target: Fund 25% of companies versus 10% today
in the Deal Terms, too… Simplified Terms + Standard Structures Correlate ownership to exit values Close the “Preferred Equity” tax loopholes Target: 1 Page Term Sheet Target: Boilerplate Investment Agreements Target: Closing costs below $10,000 (especially in the early stages)
and, while you’re at it… Introduce Fund Governance + Oversight VC Firm Board of Directors Formal Performance Feedback Solicitation Restructure the Fund Incentives Introduce “Contingent” Management fees
Why change? because VC firms have little to lose, and a lot to gain by doing things better…

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TheFunded - Canarie

  • 1. The Canarie is Dead Something is Wrong in Venture Capital -Q3 2008-
  • 2. The Lofty Goals of Venture Capital Economic Development “fund growing companies” Technology Development “in innovative technology sectors” Shareholder Returns “that generate significant shareholder returns” These are all positive goals, but are they being achieved?
  • 3. Face the Gritty Reality of Operations Successful business people raise or join a VC firm Leverage regional and experience networks Fund top companies within their networks Support the companies with their experience Successful business people often tire of the VC model The relevancy of networks diminishes over time Top companies often come from “outsiders” Relevant experience is highly situational Theory Flaw
  • 4. In a Model of “One Hit Wonders” “ The story told by Bon French, CEO of Adams Street [a fund of funds] , is that a full 5-points of the 20-points of return over that 20-year period is attributable to a single company exit within a single VC firm portfolio: Benchmark Capital's investment in eBay.” SOURCE: Startup Conversations VC Blog, April 2008 Investing billions over 20 years boils down to getting one hit?
  • 5. The Presentation Thesis Venture Capital is Broken True Innovation is Undercapitalized The Inflection Point has Arrived It’s Time for Change
  • 6. 1. Venture Capital is Broken Money does not flow where needed <10% of companies that require capital get funded The fundraising process hurts momentum Complicated, time consuming, distracting The VC industry does not generate returns Just 13% of VC companies exit in recent NVCA data Hundreds of VC firms have funds that return nothing
  • 7. Let’s Fund our Friends companies in VC networks meet strict VC guidelines other companies that need capital unfunded funded <10% SOURCE: TheFunded.com Membership Applications Google and eBay are in the small number of “other” deals.
  • 8. So our Friends can save Us How many of these M&A buyers were also VC backed? “ Will you buy my other company, please… at a premium?” SOURCE: NVCA / Thompson Reuters Exit Poll M&A IPO M&A IPO Similar number of M&A deals, yet the prices skyrocketed.
  • 9. When the Going gets Tough… 2008 YTD IPO valuations are one third less than in 1998. SOURCE: NVCA / PwC MoneyTree Reports
  • 10. 2. True Innovation is Undercapitalized VC investments are highly concentrated 6 of 17 industries receive >73% of investment “Me too” company investments are common Sectors are selected with inexperience Example: $ Billions invested into biofuels Investments have unrealistic expectations > $100 MM in annual revenue targets Ignoring advances and “foundation technologies”
  • 11. Not a lot of Portfolio Diversity Q3 2008 Investment by Sector Software Biotechnology Industrial/Energy Medical Devices and Equipment Media and Entertainment IT Services Semiconductors Telecommunications Business Products and Services Networking and Equipment Consumer Products and Services Financial Services Electronics/Instrumentation Computers and Peripherals Healthcare Services Retailing/Distribution Other SOURCE: NVCA / PwC MoneyTree Reports Where is Material Sciences? How many of these are really just Web 2.0 deals?
  • 12. 3. The Inflection Point is Here Second downturn in eight years Returns never recovered from peak highs The same VC firms are getting funded < 50 new VC firms get funded per year The outlook for VC returns is worsening
  • 13. A Line has been Crossed Fundraising Exits SOURCE: NVCA / Thompson Reuters Exit Poll SOURCE: NVCA / Thompson Reuters VC Fundraising Q3 Is more money going into the VC model than coming out? Blue is the total economic value created by VCs. Green is the total amount of money raised by VCs.
  • 14. and Nothing Changed… SOURCE: NVCA / Thompson Reuters VC Fundraising Q3 1 new VC firm is funded for every 4 existing firms funded. How many “new” firms are started by existing VCs? New Funds Follow-on into existing Funds
  • 15. 4. It’s Time for Change Less Funds + Better Funds LPs scrutinize VC investments LPs invest more money into better VC firms Target: 1,000 great VC firms versus >4,800 today More Deals + Equal Treatment Structured and published investment process Stage-specific investors Target: Fund 25% of companies versus 10% today
  • 16. in the Deal Terms, too… Simplified Terms + Standard Structures Correlate ownership to exit values Close the “Preferred Equity” tax loopholes Target: 1 Page Term Sheet Target: Boilerplate Investment Agreements Target: Closing costs below $10,000 (especially in the early stages)
  • 17. and, while you’re at it… Introduce Fund Governance + Oversight VC Firm Board of Directors Formal Performance Feedback Solicitation Restructure the Fund Incentives Introduce “Contingent” Management fees
  • 18. Why change? because VC firms have little to lose, and a lot to gain by doing things better…