The VC Asset Class Crisis Thing

by: Paul Kedrosky posted on: July 01, 2008    
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So, the venture capital "asset class" is in crisis. Or at least that's what the NVCA is saying today as it rings the alarm bell asking for politicians, regulators, venture capitalists, entrepreneurs, dogcatchers, presidential candidates, philatelists, etc., to do something -- anything! -- about it.

Of course, readers of this blog won't be surprised at news that this is the first quarter in recent history in which there have been zero, zip, nada VC-backed IPOs. I wrote about that fact here last week, and the story was picked up over the weekend by the good folks at the NY Times. So, no surprise.

Anyway, some quick points on the crisis claim:

  • Venture capital is not in crisis. It is a cyclical, bubble-driven business, and it is between bubbles.
  • Sarbanes-Oxley hasn't helped, admittedly, but that is not the core issue. Among other things, the industry hasn't been able to find enough companies about which Wall Street can get excited.
  • Venture capital still has too much money under management.
  • Average fund size remains too large. Adjusted for inflation, and based on pre-bubble 1994 figures, the median VC fund size in 2008 would be $100m, not the current $200m figure.

As an aside, I'm fond of the claim from entrepreneurs cited in the release saying that they don't want to go public anyway. Damn straight! That'll teach those Wall Street bastards! We don't want your million of dollars. We don't want to be rich. We don't want ... wait, maybe we do.

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Paul Kedrosky

Paul Kedrosky

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  •  
    ParkParadigm
    Jul 01 07:03 PM
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    While the localized factors (as to why the dearth of VC-backed IPOs) is almost certainly the primary cause of the current situation, the evolution of financial markets is leading to a secular re-positioning of the IPO as only one of many possible liquidity options, as opposed to historically when it was, along with a trade sale, pretty much the only game in town.

    Today - particularly for companies with positive cash flow - there are often a myriad of alternative ways to create liquidity for founders, management and early stage investors. Indeed going public is often the least attractive alternative and only becomes attractive if/when the public market is willing to put an - how should we say... - 'ambitious' multiple in terms of pricing.

    For most private companies in most industries, an IPO is far from the obvious exit route irrespective of prevailing market conditions. In some instances clearly an IPO is ideal - financially, strategically, etc. - but I would posit these are the exception rather than the rule.
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