2. Venture capital model is evolving
Angels increasingly competing with venture
capital firms for deal flow
The traditional venture capital model is
broken
Raising money is hard…really, really hard
3. Really expensive
Fat tailed distribution
Persistence of returns
A lot of “smart” institutions aren’t very smart.
4. American Research & Development
◦ Founded by Georges Doriot, the “father of
venture capital”
◦ $70,000 invested in 1957 in DEC returned
$355m in 1968 IPO
J.H. Whitney formed in 1946 by the
Whitney Family
◦ - One time investment of $5m
◦ - Model followed by several other
prominent families including Phipps
(Bessemer Ventures), Rockefellers
(Venrock) and Mellon Families (Mellon
Capital)
Whitney accepted first outside money in
1999
Bessemer started taking outside money in
2007
8. 8
Source: NVCA, VentureSource
Meanwhile, exit markets remain choppy with
IPOs rare and the majority of M&A activity
taking place at valuations <$50MM
Source: PWC/Thomson Venture Economics/NVCA MoneyTree™ Survey
VCs overfund companies and back several
times as many start-ups as they exit in a
typical year
0
100
200
300
400
500
$0
$20
$40
$60
$80
$100
Millions
Recent Exit Market Dynamics
Avg M&A Deal Size
# of IPOs
# of M&A Exits
0
750
1,500
2,250
3,000
3,750
4,500
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
NumberofDeals
AvgInvestmentperRound
Average VC Investment Size and Pace
Avg Investment per Deal Number of Deals
Can venture capital still make money?
9. 9
Many VCs today are forced to “swing for the fences” and <$100
million exits are considered inadequate
A typical
$500M fund
Seeking
3x, or
~20% IRR
Needs to generate
$1.5B in proceeds
Add in
fees &
carry
Now needs to
generate $1.75B
But only
own 20%
of start-
ups (if
lucky)
Thus, must
create ~$9B in
company value
But creating such considerable levels of
enterprise value can be daunting when
company mortality rates are high and
billion dollar exits remain rare
Historically, more than half of
companies have returned less than the
capital invested in them
VCs needs big deals and HUGE returns
12. 6,231
9,976
3,491
1,700
5,321
8,583
6,371
0
4,000
8,000
12,000
16,000
Seed Early Expansion Later
US$Millions
Investment Stage
Funding by Source and Stage- 2010
Venture Capital
Angels
• US $20.10 billion
• ~61,900 deals
• 31% seed/startup
• 67% early/expansion stage
• 265,400 individuals
Angel Investors 2010
• US $21.97 billion
• ~2,750 deals
• 8% seed/startup/ 24% early stage
• 68% later/expansion capital
• 462 firms active
Venture Capital 2010
Source: Angel Capital Assoc.
13. Powerful Trends Underpin Disruption of the Status Quo and Make VC Profitable,
Again!
Venture Investment Associates
Trends Favoring Lower Capital Needs and Supporting Agile Start-ups Lead to Profitable Exits
13
Lower Start-Up Costs
Faster and More Agile
Development
• Cost reductions in processing power, storage,
and bandwidth
• Innovations in virtual infrastructure (Cloud)
• Open source software and tools
• Off-shoring of low value-added work
• New web dynamics & business models facilitate
rapid customer adoption (viral growth)
• Ability to scale businesses in response to
(not necessarily ahead of) growth
• Parallel processing of idea testing
• Quick pivots allow for more flexibility
• Allow bad ideas to fail faster, requiring less
investment in unproductive ideas
The amount of capital and time required to get a start-up to first
product shipment are a fraction of those needed a decade ago
Developments in Technology and Business Processes Have Slashed
Start-Up Costs and Sped Up Development Time
The decimalization of NASDAQ trading killed the small IPO by causing research and
market making to be too costly, but
The capital efficient start-ups has made small trade-sales
profitable with multiple possible exit points
Source:
Anonymous Small
VC Firm
17. Venture capital model is evolving
Angels increasingly competing with venture
capital firms for deal flow
The traditional venture capital model is
broken
Raising money is hard…really, really hard
18. The Venture Capital Cycle, Gompers and Lerner, 2006
Venture Capital and Private Equity Casebook, Lerner et al, 2008
The Art of the Start, Guy Kawasaki, 2004
Beyond the J-Curve, Meyer & Mathonet, 2005
Capital Ideas, Against the Gods and Power of Gold all by Peter Bernstein
This Time is Different, Carmen and Rogoff, 2009
Where are the Customers’ Yachts?, Fred Schwed, 1985
The Myth of the Rational Market, Justin Fox, 2009
The Millionaire Next Door, Stanley and Danko, 1998
When Genius Failed, Roger Lowenstein, 1998
Ahead of the Curve, Philip Delves Broughton, 2008
Pioneering Portfolio Management, David Swensen, 2000
Liars Poker, Michael Lewis, 1990
What Works on Wall Street, James O'Shaughnessy, 1998
