This is not just another Big Data story. Or just another post on innovation. Or another good read on entrepreneurship. But it does touch on all of those things. And it shows the very real impact innovation and big data can have on our lives.
A few nights ago I walked some of the toughest Boston neighborhoods with Ed Powell, the Executive Director of StreetSafe Boston, meeting former gang leaders. StreetSafe is an organization which puts young caseworkers on the most violent streets in Boston to intervene in gang activity – literally standing in the line of fire. Ed is a real inspiration himself, having grown up in these same neighborhoods. The brilliance of this start-up is to focus resources directly at one of the most disturbing problems facing our cities today – kids killing kids. You see, Ed has recruited his own gang – a team of counselors, some of whom are former gang leaders (whom he calls “street workers”), to connect with current gang members to re-direct them toward job training and other social services. After a shooting in these neighborhoods, Ed’s “gang” is up most of the night literally preventing further retribution violence.
That night I learned a number of troublesome and distressing facts about Boston’s gang situation.
- 70% of shootings in Boston happen on only 5% of the city’s blocks so the problem is readily identifiable.
- One in 100 of Boston’s youth belong to gangs; those kids account for nearly 75% of the city’s gun violence.
- There are estimated to be 120 gangs in Boston, but few if any national gangs. Our gangs tend to be smaller and organized on a hyper-local basis, literally a gang on each street – which makes for dramatic scenes of urban warfare given the proximity of these gangs. Watch a gang member on the street and see how his head is constantly swiveling.
- A 1.5 square mile area accounts for nearly 80% of our shootings and murders – that is a really small area. It is effectively a one mile stretch down Blue Hill Avenue, which is monitored by only four of Boston police districts.
- Not surprisingly these gangs are highly organized and are run like small start-up’s. Unlike years ago, drugs today are not the major contributor to gang violence in Boston, but rather historic grievances passed from one generation to the next. Coincidentally, my firm (Flybridge) met with a very interesting start-up out of Harvard today called Nucleik, which has developed software to map gang hierarchy (they were also featured on 60 Minutes this past weekend).
- Recently enacted local legislation, which instituted 10-15 year mandatory prison sentences for gun shootings, has led directly to a significant spike in stabbings. For some reason, not yet understood, stabbings in the South End have increased even more dramatically this year.
- Nearly 25% of gang shootings result in death.
- The Big Data angle: Ed is aggressively capturing a number of variables to better characterize gang profiles – ethnicity, number of conflicts, age and race of participants, addresses, social connections, etc.
With better data capture, Ed believes he can more precisely segment gang populations and therefore develop more tailored, more appropriate solutions to reduce gang violence. Ed has the “street workers” carry diaries to log dozens upon dozens of data points when they are out on their shifts. Impressively, in StreetSafe’s third year of operation, his 20 “street workers” are engaged with 332 active gang members and have spent, on average, 52 hours with each youth – a highly leveraged business model. His four Case Managers, who manage transitions for these gang members into job training, remedial education or other social service programs work with 171 youths and have placed 67 of them in jobs.
And the initial data support his thesis of the power of this type of intensive intervention. The gangs which work with StreetSafe exhibited a 32% reduction in shootings over the first three years of engagement. Many of the neighborhoods studied showed even more dramatic reductions (Grove Hall down 46%, Bowdoin/Geneva down 54%, Morton/Norfolk down 47%), while some neighborhoods were only modestly down, and for some yet unknown reasons, Dudley was up 43%. Better analytics should bring more clarity to why that is. I hope to have one of our Big Data analytics portfolio companies look at this problem as well.
As StreetSafe expands, and more data are collected, it should be even more evident that this level of outreach will lead to far fewer fatalities. On behalf of the Boston Foundation, StreetSafe’s most significant benefactor, Harvard University is conducting a multi-year, multi-million dollar Big Data study to better understand the complexities of inner city youth violence, so there is an expectation of greater insights shortly.
But how do we calculate the ROI on fewer shootings? When you meet these kids, you conclude it is immeasurable.
One of the more interesting press releases from the National Venture Capital Association (NVCA) is the VC Quarterly Fundraising announcement which came out yesterday for 4Q12. The data serve as a weathervane for the industry, indicating how much capital was raised – by firm, by geography, by investment strategy.
For a reasonably extended period of time – over the past four years – the VC industry has been investing more capital than it has been able to raise in new funds. I have been worried that this dynamic will end abruptly (i.e., badly) as one would logically conclude the investment pace needs to dramatically slow as firms invest the balance of their funds. Or fundraising would increase materially (but that has not happened). This imbalance is not sustainable.
The headline for this past quarter was quite positive; 42 funds raised an aggregate of $3.3 billion, which meant for all of 2012 $20.6 billion was raised by 182 funds, which compares favorably to 187 funds and $18.7 billion in 2011. Notwithstanding the more modest 4Q12 activity ($5.1 billion was raised by 56 firms in 3Q12, $6.2 billion by 54 firms in 4Q11), that felt understandable given the concerns and distractions surrounding the election and fiscal cliff, and frankly, the continued lack of meaningful and consistent liquidity. But some of the details buried in the data provide a more nuanced picture of 4Q12 fundraising activity.
- The largest fund in 4Q12 was Sequoia’s $700 million Growth fund, which interestingly is only the ninth largest fund raised in all of 2012. The second largest fund in the quarter is only the 16th largest fund for the year. Clearly funds continue to trend smaller in size.
- The top 5 funds accounted for 56% of all capital raised; the top 10 accounted for 75%. Clearly continued concentration of managers.
- 17 funds were classified as “new” while 25 were “follow-on.”
- Of the top 10 funds, one is in New York, none are based in Boston, two are healthcare, and two are deemed “new” – which is perhaps somewhat misleading – NovaQuest Capital (~$250 million) is the investment team from Quintiles which had been investing together since 2000 (in fact the fund is labeled “III”) and Costanoa Venture Capital ($112 million) is reported to be constructed with a number of existing positions spun out from Sutter Hill Ventures.
- The average size across all 42 funds is $78 million but the median is $24 million.
- The average size of “new” funds (including NovaQuest and Costanoa) is $34 million; excluding them the average drops to $14 million.
- Of the 42 funds, 13 are less than $5 million in size while 5 are less than $1 million!
- Many of the funds raised this past quarter appear to be “side car” funds of existing, longstanding venture firms.
Consistent returns and liquidity should reverse the fundraising trends driving the VC industry to be smaller and more consolidated. Given the strength of the public markets over the past year the overhang of the “denominator effect” should also be less of a concern in the near to medium term. Unfortunately it may take time for many LP’s to adjust their portfolio allocation models to increase exposure to VC. But that will happen. Hopefully the news in 90 days will hint at that.
The National Venture Capital Association (NVCA) and Thomson Reuters released today the 3Q12 VC fundraising data, which is a report I eagerly await as it is a barometer of the health of the VC industry. And while 53 funds were raised – the largest number since 3Q11 – only $5.0BN was raised which continues the quarterly trend downwards since mid-2011; there was $6BN raised in 2Q12. Year-to-date VC’s have raised $16.2BN which suggests that for the full year VC’s will raise between $21-$23BN – not too shabby given the Great Recession and the generally uninspiring returns for the past decade across the industry. In all of 2011 VC’s raised $18.6BN. But it is what is beneath the headlines that I always find fascinating…
- No doubt the industry is shrinking (which over time will be very healthy for those firms that remain active) – year-to-date there was a 13% decline in the number of funds raised when compared to the same period in 2011
- But over that same year-to-date period the amount of capital in 2012 was up 31% when compared to the first nine months of 2011 – which included arguably the worst two quarters in recent memory (2Q11 and 3Q11) for VC fundraising
- Interestingly, of the 53 funds raised, only 16 were new funds (more on that later)
- If one considers NEA a Silicon Valley firm (I know they are headquartered in Baltimore but they have a very large and successful west coast practice), the top five funds raised are in San Francisco and represented 55% of the capital raised
- Nine of the top ten funds are in California; #10 (Pharos Capital) calls Dallas and Nashville home
- The average size of fund raised in 3Q12 was $94M, although the median was $160M
- This is more troubling – the average size of new first-time fund raised was $9M while the median was $2.5M (that is not a typo). In fact 19 of the 53 funds raised this past quarter were less than $5M in size
- The largest new first-time fund raised was by Forerunner Ventures ($42M) which ranked #22 of the 53 funds raised
- The largest fund raised in 3Q12 was the $950M growth fund raised by Sequoia Capital – the rich get richer!
So what is there to make of all this? While I expected more rapid contraction of the industry, the amount of consolidation at the top of the pyramid is dramatic. Arguably this implies a more challenging time for entrepreneurs as there continues to be fewer robust VC franchises available to them, and those that are active, will tend to be centered around San Francisco. On a more hopeful note though, VC returns have meaningfully improved in recent times so perhaps we may start to see over the next few quarters a greater fundraising pace across more firms – a trend well worth monitoring.
I spent some time this weekend looking at the recent VC funding data for this past quarter to see if any trends jumped off the page. While much of what I could discern in the data felt consistent with what I experienced in the market, there were some surprising themes buried in the details.
In general investment activity this past quarter continued to show some resilience: $7.0 billion was invested in 898 deals, which was an increase of 17% in dollar terms and 11% in number of deals from 1Q12 but importantly was down 12% in dollar terms and 15% in number of deals from 2Q11 (arguably a more relevant comparison). This past quarter, when annualized, was tracking to an investment pace below 2011’s aggregate amount of $29.5 billion but ahead of 2010’s level of $23.4 billion – so evidence of continued recovery from the depths of 2008/2009 recession.
Some other interesting high (and low) lights from the 2Q12 data:
- A major storyline was the strength of the Early stage market. In terms of number of deals, the 410 deals ($2.4 billion) was the highest quarterly level since 1Q01 – over ten years ago. Average deal size was $5.2 million.
- When Seed and Early were lumped together they represented 53% of all deals in the past quarter; in 1Q12 they were 46% of total deals and 48% in 2Q11. Maybe funds are investing earlier to extend the investment runway of their existing funds? It also reflects the continued robustness of the “micro-VC” model which has come of age.
- Average size of Seed deals was $3.2 million, which frankly does not sound like a seed deal to me.
- $2.1 billion was invested in 193 Later stage deals for an average size of $10.8 million. Later stage declined 10% on a dollars basis and 11% on number of deals basis over the past two quarters – which is not what I would have expected as VC’s look to invest closer to the liquidity event.
- “First time investing” – that is the number of companies raising VC dollars for the first time was up 27% from the prior quarter and represented nearly 15% of dollars invested and 31% of all companies which raised capital this past quarter.
- As a reflection of the broad rotation away from industries that are capital intensive with long product development cycles, life sciences was really hurt this past quarter, attracting only $1.5 billion of the total $7.0 billion invested (or 21% of the total). In 2Q11, the life sciences attracted 29% of all VC dollars. Notably biotech declined from $1.4 billion to $0.7 billion across those two quarters.
- Software category strengthened this past quarter increasing to $2.3 billion across 290 companies which ironically was the same number of companies although only $1.7 billion in 2Q11.
- Another fascinating storyline involved cleantech – which many analysts had written off for dead. On a dollars basis cleantech investing increased 8% from prior quarter but the number of companies was down 28%. The average deal size for cleantech was $18.9 million, and in fact, the top three deals in the quarter were all cleantech investments (Fisker Automotive, Harvest Power, Bloom Energy – together those three companies raised $360 million or 5% of all VC dollars invested last quarter).
- The top ten deals in 2Q12 raised $876 million or 12% of all VC dollars. Interestingly, as the VC industry consolidates, are we also going to see more consolidation around which companies attract VC dollars? Worth watching.
- Nothing terribly interesting when one looks at the region data. Silicon Valley still dominates having attracted $3.2 billion of the $7.0 billion invested (46%) which is up strongly from 39% in 1Q11. New England, which remains comfortably in the Silver Medal position at $843 million invested, was only 26% of the amount for Silicon Valley. The New York Metro region attracted $567 million, which is a 52% increase from the prior quarter but down 15% from the prior year’s second quarter.
- And one of my favorites: there were 10 states which had zero venture deals and 27 which had three or less – another sign of VC consolidation – many states are at risk of being left behind as the VC industry consolidates.
Obviously the venture industry is now comfortably a global phenomenon so I also looked at some headlines from overseas…
- Interestingly, and quite surprisingly, Europe VC investing activity increased by 37% to 1.26 billion Euros in 273 deals this past quarter.
- China, though, decreased by 45% to $1.9 billion in the first half of 2012 when compared to first half 2011 (which compares to $13.1 billion in the US) across 103 deals, which was down 38% year-over-year (as compared to 1,707 deals in the US in first half 2012).
An interesting report from the law firm Cooley crossed my desk this week titled “Cooley Venture Financing Report” – ok, maybe not that interesting – but the report looked at their 2Q12 venture deals (n=82), so presumably a representative perspective on what is going on with valuations and, nearly as important, terms.
The two headline trends surprised me: valuations tended to be up and terms were balanced between company and investor. So now some of the data:
- Valuations: Pre-money valuations for Series A, B, C and D+ rounds were $11, $40, $54 and $140 million, respectively. I am surprised at how high the Series A and B rounds were priced and at how low the Series C rounds were valued (and who knows what are in the Series D+ data so I will ignore those deals). Let me explain. Series A round sizes have been coming down over the last few years as companies can get by with raising less capital and given the crummy general economic conditions; therefore I expected valuations for Series A to be a fraction of the $11 million witnessed. If companies are raising ~$5 million in typical Series A rounds, this means that early investors are getting a 2+x mark-up’s in the Series B rounds and management is not suffering as much dilution (remember it is not how much you raise, but how much you own). Now Series B rounds tend to be $10 to $15 million in size, which implies that the C round valuations are basically flat to the B round. Arguably the risk profile of many Series A companies is not meaningfully different than that of a Series B company (lack of repeatable sustainable commercial proof points, maybe incomplete team, product development still work in progress, etc) – thus my surprise. Similar risk at very different valuations.
- Terms: I expected the pendulum to swing very much in the favor of investors for two reasons – capital is so scarce and with the bifurcation of the venture capital industry (large vs small firms), I expected to see more punitive terms come to the fore to drive syndicate alignment and good investor behavior as smaller, weaker VC’s run out of capacity (entrepreneurs – be very thoughtful about how you construct your investor syndicate). I had also expected to see more “financial engineering” introduced into term sheets so that VC’s could convince themselves of generating a reasonable return even in a modest outcome. I will highlight a couple of the more controversial terms and what Cooley saw in the 2Q12 data.
- Liquidation Preference – Across all 82 deals in this cohort, 100% had <=1.0x liquidation preference which was very surprising to me. In a typical quarter we see 10-15% of all deals with preference greater than 1.0x, so while not a significant percent, it is always present.
- Participation – Appeared to be more prevalent across all Series of rounds; in early rounds participation was present nearly 75% of the time and in later rounds, it was there around 55% of the time.
- Recapitalizations – I had expected this phenomenon to be quite evident but in fact it was only in 12% of the Cooley deals (it had been between 6-8% for the previous five quarters. With the explosion of new company creation over the past few years, I thought we would see many tired syndicates looking for a fresh start.
- Tranched Deals – For many of the same reasons as with recaps, I expected to see this be a very big number but it was only 15% of the time, and actually down from the typical 20-25% from prior quarters.
- Pay-to-Play – This was probably the most surprising one for me. Only 18% of deals (and only with Series C) was this term present. This speaks directly to ensuring a strong supportive syndicate; if some investors stop supporting the company, there would be punitive ramifications. I had expected this to be closer to historic norms of 25 to 30% of deals.
So one final thought…something I have been wrestling with for some time now is how many venture firms can reliably, predictably and on their terms raise a new fund in this environment? Tough question to answer but the data may shed some light.
According to the NVCA Yearbook 2012 there were 842 VC firms in the US at the end of 2011 which have raised capital in the past eight years; of that cohort, 526 firms were deemed “active” – which means they made investments totaling $5 million that year (frankly, a pretty low bar). Interestingly, at the end of 2011, there was approximately $197 billion under management in the US venture industry. Also of note there were 1,012 firms in 2006 so the industry lost 170 firms (or 17%) over the past five years; that same year there was $288 billion under management, which means from a capital managed perspective the industry shrunk by 32% over that same five-year period.
So this is what is so potentially daunting. This past quarter there were 10 firms which raised funds larger than $100 million, which I would deem as a threshold to be material to the overall industry. If this past quarter is representative of the new reality then, and firms raise new funds every four to five years, might one conclude that there is only room for only 160 – 200 firms? Are we looking at an industry that may contract by another 50% – 75% in terms of number of firms?
More numbers. The median fund size of those top 10 funds raised last quarter was approximately $350 million; across those same 160 – 200 firms that would be $56 – $70 billion raised over the next four to five years. Does that start to suggest where we are heading and how large the VC industry will be? The last time the VC industry was less than $100 billion was in 1998 ($91 billion managed).
Undoubtedly this is too dark a picture. We are investing in a time of unprecedented innovation which will drive superior investment performance. As returns and liquidity come back, LP’s will be drawn back to the VC asset class – but the analysis is thought provoking nonetheless.
What do you think? What percentage of firms today can raise a fund on their terms? 5%? 10% 25%?
Last week the National Venture Capital Association (where I am on the Executive Committee) and Thomson Reuters announced the 2Q12 fundraising data for venture firms – don’t worry, you are excused if you did not see the results. Not pretty. The data has some potentially troubling implications for entrepreneurs, not just GP’s.
While the headline looked encouraging with $5.9BN raised this past quarter, which ironically compares very favorably to many of the recent quarters since the Great Recession started over four years ago, it is the details which are more disturbing. If you annualized last quarter’s pace you might conclude that the VC industry is back to raising around $25BN per year – which is about how much we as an industry invest each year. But as you can see in the chart below, the number of firms which raised capital (38) is very much a low water mark and most of the capital went to a small number of firms.
So why am I so disturbed by these results? Couple of high/low lights in the detailed data:
- Of the 38 firms which successfully raised new funds this past quarter, only five firms (NEA, IVP, Lightspeed, Kleiner, Mithril (Peter Thiel)) accounted for nearly 80% of the total dollars raised
- Of the top five funds raised, four were at least the ninth fund that firm had raised
- Notwithstanding that NEA is headquartered in Baltimore (with a very significant and successful Silicon Valley presence), the other firms in the top five are based in the Valley – which may raise concerns over time about the geographic diversity of how innovation is funded in this country
- 10 of the 38 funds were from new managers, which also is the lowest number of new venture managers since 2Q09 – which very much underscores that LP’s have largely turned their collective backs on new venture firms trying to get into the market
- 14 of the 38 firms raised funds which were less than $10.5MM in size each; these firms raised a total of $104MM, which is less than 5% the size of the largest fund raised by NEA ($2.1BN)
- The median fund size was $11.5MM
- Many LP’s are concluding that the optimal size venture fund in this environment is “a few hundred million dollars” but as funds size shrink, more capital intensive industries like biotech and cleantech will be increasingly out of favor
- When I stare really hard at the list of funds, many of their names suggest that they are really annex funds or small follow-on investment partnerships of existing funds which arguably overstates the number of new funds raised
- And what the data does not show is how long these funds took to be raised – that is a real barometer of the health of the VC industry
Having said that, though, the venture industry has a marvelous ability to re-invent itself in the face of poor returns and lack of liquidity, as we are seeing in real time with new creative investment models (micro-VC, super angels, etc). Notwithstanding that observation, the VC industry is characterized by both high barriers to entry and barriers to exit, that is, it can be hard to get in and for many firms that have raised multiple funds, most times it is hard to be pushed out!
But what is most disturbing for me is that the concentration of capital in fewer and fewer hands operating with very large venture funds will make it meaningfully more difficult for companies to be funded. And I am not simply referring to raising your first $500k seed round to build an initial product, which there appears to be no shortage of today, but raising more meaningful dollars to build your company (which still takes real money).
We are in an environment where too many “look-alike” companies have been seeded with quite modest amounts of capital, and when they come back to raise their first institutional round, those entrepreneurs will be surprised by the relative paucity of Series A/B/C VC firms which are actively investing.
So what is a CEO to do? Be hugely capital efficient and get out there now and start meeting as many VC firms as you can.
So here is my obligatory post on Facebook…which will be the most spectacular IPO of a venture-backed company in the history of mankind…and it just priced tonight.
The shares priced at $38 giving the company a market cap of $104BN fully diluted, raising $16BN in proceeds. Of the 421MM shares being sold, 57% (or 241MM shares) are being sold by insiders; in the past few years only LinkedIn and Pandora had a higher percentage of shares coming from insiders. Assuming the “green shoe” over-allotment option is exercised, the total amount of proceeds will exceed $18.4BN. And this is where I want to focus.
Putting aside the potential negative signaling of all this insider selling (and General Motor’s voting with their feet (or tires) this week), what is the impact on the VC industry with all this liquidity? First – according to Fortune – some of the numbers:
- Individual shareholders (mostly Zuckerberg) are selling $3.2BN of stock and will retain stock worth $27.7BN
- Institutional shareholders are selling $8.3BN of stock and will still hold $15.8BN
- This does not include the existing institutional investors (T. Rowe Price, Andreessen Horowitz) which hold about $1BN of stock and are not selling, nor does it include all the other employees who are now fabulously wealthy
- Of the institutional investors, $5.1BN of stock being sold is held by institutions which have traditional LP’s and/or are themselves LP’s. This same group of investors will still have $10.6BN of Facebook stock yet to be sold.
For me what is most interesting is to speculate about what is to become of all this liquidity. The venture industry has struggled mightily to raise capital; in the past few years the VC industry has raised between $12 to $15BN annually. As these proceeds are realized and distributed, do much of these dollars get recycled – that is, will underlying LP’s begin to increase their allocations to VC as they start to see Facebook distributions? The math suggests that one year’s worth of VC fundraising is now in around half dozen VC firms fortunate enough to have invested in Facebook!
Additionally, we are watching a very deep and wealthy pool of new angel investors get created and collectively they will play a powerful role in the next wave of great company formation. Much like the “PayPal Mafia” from the last decade which sponsored many of this cycle’s great companies, the Facebook Mafia should do the same over the course of the next decade. These individual investors themselves could become significant LP’s in many venture funds which, if that were to be the case, would further drive VC industry expansion.
Or is this just all wishful dreaming?
A few days ago I attended a wide-ranging set of discussions for Harvard Business School graduates regarding the state of the VC industry. The discussions covered issues from international developments in Asia to how best to structure models of innovation to LP perspectives. I furiously made notes and thought I might share some of the highlights.
VC Developments Overseas:
A decade or so ago there was enormous excitement about VC investing in Asia. We watched with great anticipation as US VC’s “exported” our industry overseas, investing aggressively in business models which had exploded on the scene here and were now being launched in India and China. This naturally led to the creation of strong local VC franchises in those markets. Arguably these markets came of age very quickly which caused some of the participants to express some words of caution.
- Many of the China investors felt that we are now in very uncertain times. The failure of a number of China IPO’s, the emerging waves of disclosure around fraud and accounting irregularities, and the every present trifecta of lack of property/human/intellectual property rights were underscored. True economic reform in China did not start until the late 1990’s – less than 15 years ago – when the banking system was reformed. Have expectations outrun realities?
- There are now over 4,000 RMB investment funds in China.
- “China is transitioning from a consumer of know-how to a producer of know-how.”
- One the largest PE investors in the world shared that returns in China have been less than expected, and at best in line with other markets – that was quite sobering to hear.
- Others observed that China is 17% of global GDP and “will become an asset class.”
- India, on the other hand, has over 500 angel networks, a national stock exchange which has been vibrant for the last 20 years, and has a proliferation of national incubation funds.
- Many of the India commentators were very complimentary of that country’s ability to aggregate numerous private sector initiatives, but worried that the bureaucrats making these allocation decisions were quite inexperienced.
- Interestingly, the largest biometric database – until recently – was the FBI’s database, estimated to number 60 to 100 million people; India launched a national effort a few years ago and now has logged 250 million people – going to 600 million people in 18 months! As someone who is fascinated about Big Data in the healthcare space, that holds extraordinary promise. It was also pointed out the North Korea has catalogued all 26 million of its citizens – probably little VC opportunity there!
There was an interesting discussion around models to drive innovation featuring NASA’s Tournament Lab program, which is a set of crowd sourced “contests” where the community at large is asked to solve problems NASA is grappling with (I wrote about NASA last year). This approach was juxtaposed with traditional approaches which include…
- Internal Development: one defines the problem, finds the right internal workers, creates an incentive structure, monitors outcomes and then PRAYS for performance, which is opposed to…
- Contest Model: one defines the problem, establishes evaluation criteria, sets the prize (often quite modest in the case of NASA), recruits problem solvers from the community and then PAYS for performance
Limited Partner Impressions:
The final set of discussions involved the LP’s – our customers. One of the largest state pension funds, which very publicly lowered its VC allocation targets in its portfolio model, observed that VC returns have “detracted from overall performance in all time periods” – that kind of stings! On the other hand, LP’s from leading academic endowments had the exact opposite conclusion and shared that “VC has been a great performer for the endowment.” So a couple of conclusions I left with…
- As an LP, if you can get access to any manager you want, one can construct a fabulous portfolio of VC managers. Today, where access is not a meaningful issue, LP’s would be wise to lean into VC.
- Large pension funds have hundreds of VC relationships, which by definition, will drive overall performance to be median – and median VC returns have been bad. Full stop.
- There was a strong sense that there will be increased dispersion of returns from the median going forward, which for the last decade or so have been compressed.
- Even though VC returns overall have been uninspiring that in no way is to suggest that there have not been some spectacular funds.
- There are over 40 sovereign wealth funds which manage ~$4 trillion of capital; two-thirds of which were founded in last ten years. There is an expectation that they may be increasingly an active force in the VC industry.
Two other random observations:
- Everyone was focused on the fact that the amount of capital to get to point of failure or point of acceleration in most VC-backed companies is now at an all time low, and this will further cause the VC industry to shrink as fund sizes will/can be smaller
- The recently released Midas List (top 100 VC’s) has 33 people who went to a school in Boston – but only 3 on the list currently reside in Boston. That is a problem given how much of the nation’s VC dollars are managed in Boston – and we remain the second largest innovation economy behind Silicon Valley.
“Big data, little data…” Sounds like a Dr. Seuss book. Hadoop…Splunk…sound like characters in one of his books. Data is everywhere. Given Big Data is all anyone can talk about today, I have spent the better part of the past year immersed in many forms of data, trying to sort out where we might consider investing.
At its core these platforms are attempting to make sense of unstructured, often times, machine generated data to provide unique actionable insights – and not just for the Head of the Analytics Department, but for all employees. The desire to re-use, share and store this unstructured data has opened up enormous market opportunities up and down the IT stack. My particular focus is around the applications which are creating “smart tools” to drive innovation in the enterprise – and it is clear that every market vertical will be impacted. My most recent investment is in the Big Data analytics space for health plans – and it is very cool – more to come.
The IT stack today involves the following hierarchy: collection > ingestion and storage > discovery and cleansing > integration > analysis > delivery. I am most focused on the right side of this equation (some of my partners have made some very compelling investments on the left side of that equation such as 10gen, Nasuni, Crashlytics, Tracelytics, InfoBright). Out of my exploration there have been a number of interesting insights and funny sound bites which inform some of our Big Data investment themes:
- Big Data will democratize the enterprise, that is, all employees will become analytics experts who will drive work flow and productivity improvements – move the battlefield to front line employees
- The “3 V’s” – velocity, variety and volume – are not going away, in fact they are only getting more severe
- Movement to real-time analytics from batch processing is very powerful particularly in industries which process transactions where insights can now be moved from post-pay to pre-pay and pre-settlement (so rather than detecting fraud after the fact, fraud can now be readily detected prior to the transaction)
- Real demand driven supply chains
- Real need to drive insights from legacy IT architectures, particularly in the small to medium end of the market, who will be reluctant to overall existing infrastructures
- Make Big Data small data or useable data through adaptive algorithms
- In early innings of hyper-targeting across every industry
- “Social sensing” will overhaul product development, stocking decisions, better forecasting and alerting, etc
- Love the comment that “we are not looking to build more dashboards, but instead, cockpits”
We will undoubtedly be more refined and precise over time in how we look at the Big Data investment opportunity set. As part of this evolution, Flybridge hosted a Big Data CEO dinner a few weeks ago in Boston to identify how best to galvanize the community and where the greatest opportunities lie. In addition to great wines, there was a lot of enthusiasm for the new tools and architectures which are coming into the market. A follow-up dinner is being planned for the near future to better frame the opportunities – I welcome any suggestions for that agenda.
For me right now I am fascinated by the Big Data opportunities across the healthcare delivery system; as the FDA has become prohibitively hostile towards therapeutics and medical device companies, healthcare analytics is an area where profound benefits will be derived. As I mentioned earlier, my most recent investment is an analytics company focused on health plans – and the insights they are already demonstrating have enormous cost and revenue impacts for every health plan. Stay tuned – more to come.
We have just wrapped up the National Venture Capital Association annual meeting in Santa Clara, and amidst the gloom, there are a number of bright spots and even compelling reasons to be excited again. Clearly one of the highlights of the last two days was hearing legendary VC – Arthur Rock – when receiving the Lifetime Achievement award say “Writing the check is easy; doesn’t take much ink…”
Any investor would be pleased to have invested in just one of Rock’s many successful portfolio companies (Intel, Apple, Fairchild Semiconductor, Teledyne, Scientific Data Systems, etc). Listening to Rock and his re-telling of the many great war stories of the early days of the VC industry highlighted some of the parallels to what we are once again (hopefully) seeing – great and hugely disruptive new companies, explosive markets being created in very short order, brilliant and passionate entrepreneurs out to change the world. And maybe a return to a smaller VC industry – Rock’s first fund was $5 million and he did not invest more than $300k in any one company!
All this was echoed in Frank Quattrone’s (Qatalyst) comments earlier in the program who reported that he had not seen such optimism in the capital markets since the mid to late ‘90’s – although he did tick off the obligatory concerns such as domestic housing, China mark-down’s, Europe, modest growth, etc. Quattrone also noted that over the last few years there has been on average $150-$200BN of tech M&A which he expected to continue through 2012. His optimism was founded on six important trends he sees in the market: (i) enterprise models trending towards vertical integration (ii) move from “over-provision” to the cloud (iii) desktop transition to mobile (iv) structured going to unstructured data (v) physical to now digital commerce, and (vi) search being replaced by social/mobile/local. Quattrone closed by predicting a meaningfully more robust IPO market which is already helping to drive private market valuations to levels not seen since the ‘90’s ( can you say Instagram?).
Other chatter in the hallways included:
- Pats on the back all around for the JOBS Act, favorable definition of what the VC industry is and isn’t for regulatory purposes, defeat of SOPA/PIPA
- This may be the most uncertain period in DC over the last 20 years and there is little to no expectation of meaningful regulatory advances through the end of the year
- SEC is very nervous about crowd funding as they are still trying to get their collective arms around the Dodd-Frank implications
- Tax reform debate in 2013 may take on eliminating any differential between capital gains and ordinary income rates, as well as challenge “pass through” entities (and impose corporate tax structures on them)
- Real crisis at FDA as they take on the reauthorization of “user fees” which apparently covers ~40% of the FDA’s annual budget. This all needs to be wrapped up before year-end or the FDA shuts down. All this urgency, optimists believe, may drive real FDA reform.
- Cumulative market capitalization of listed securities on NYSE (they were a sponsor) is $24 trillion dollars – much of which I am now convinced Arthur Rock is responsible for.
Yesterday the National Venture Capital Association (NVCA) – in conjunction with Thomson Reuters and PricewaterhouseCoopers – released 1Q12 funding data for the VC industry, and frankly the numbers are startling – but yet in some sense, upon reflection, not surprising. For the quarter there were 758 deals which raised $5.8BN, which was down 19% on a dollars basis and down 15% for deals from 4Q11. If you were wondering, these levels are down 13% (dollars) and 12% (deals) when compared to 1Q11.
The VC industry is contracting and consolidating swiftly, but oddly the amounts invested have been tracking meaningfully ahead of the dollars raised by VC firms. The graph below shows that the lines have been diverging for nearly four years – this won’t end well. Clearly the dramatic reduction in amounts invested in this past quarter suggest that the lines may now be starting to converge – at a minimum trending downwards and will probably settle at meaningfully reduced levels, perhaps as low as $12 – $15BN per year for both amounts raised and invested. Ironically they may still not converge as the VC industry struggles to raise capital.
As I studied the data this weekend I observed a number of other important themes which entrepreneurs should be mindful of as they consider raising capital.
- Even the Software category was soft in 1Q12 – $1.6BN across 231 deals which was down 18% in dollar terms from last quarter (average size ~$7MM per financing)
- Biotech took it on the chin – $780MM invested in 99 deals which is down 43% in dollar terms and down 14% in number of deals from last quarter (average size ~$7.9MM)
- Cleantech was not saved from the downdraft either – $951MM across 73 deals which was down 30% dollar terms and down 11% in number of deals from prior quarter
- Even Semi’s were not spared, down 43% in dollar terms quarter-over-quarter
Clearly as the VC’s invests fewer dollars in any given quarter, most categories will be down. What is most striking is the continued and strong rotation away from industries that have significant scientific and regulatory risks, and are also characterized by long times to generate investor returns. Notwithstanding popular opinion, VC’s aren’t dummies.
Other observations around stage are also notable.
- Late Stage investing was up 11% this quarter and represented 40% of all deals. Clearly there is a rotation to opportunities nearer to liquidity, which most funds need to show in order to raise new funds. There was $2.3BN invested in 208 Late Stage companies this past quarter which was consistent with the $2.4BN and 234 deals in 1Q11.
- “End of the Great Seed Experiment” which is something I have been saying for the better part of a year – there was only $141MM invested in 53 deals in 1Q12 (admittedly I think that number is under-reported) as compared to $156MM and 90 deals in 4Q11 and strikingly to the $211MM and 86 deals in 1Q11. I have been on this thread for some time; that is, the VC industry is at risk of having created too many “me too” companies, and with less capital to invest across the board, many seed entrepreneurs will be deeply saddened when they come back to market for their Early round…
- Softness in Early rounds – $1.6BN was invested in 290 companies which were materially down from $2.3BN and 382 deals in 4Q11 (and somewhat so from 1Q11 – $1.8BN and 320 deals). VC’s over the last few quarters went very early (how many “seed programs” were started?!?) and now they are going later to either support existing portfolio companies or buying pre-liquidity companies.
The geography debate also grinds on with some surprising data in 1Q12. Of course the Valley still dominated – not newsworthy – but there was some hint of re-ordering of the silver and bronze winners.
- The Valley saw $2.1BN invested (36% of national total) in 213 deals (28% of total) which is interesting when you see that California in total was $3BN in 294 deals. Interestingly in 4Q11 the Valley witnessed $3.3BN (46% of total) in 289 deals (and $2.7BN in 251 deals in 1Q11). Surprised by the “percent of total” data, which probably bears watching more closely.
- Massachusetts had $628MM invested in 90 companies as compared to $678MM in 97 deals in all of New England. The data for Massachusetts in 4Q11 was $757MM in 92 deals, so some meaningful deterioration quarter-over-quarter, but not as severe when looking at 1Q11 data of $670MM in 86 deals.
- And so how did New York do? In 1Q12 the New York Metro area saw $378MM invested in 75 deals (New York State was $271MM in 62 deals), which is less than both Massachusetts and New England – interesting. In fact New York Metro was less than Texas. The NY Metro region had $576MM in 84 deals in 4Q11, so there was quite a drop heading into 2012 (for 1Q11 the numbers were $586MM and 82 deals). That is very surprising to me.
- Lastly, and this one always amuses me, 11 states in the country had zero – nada – VC deals, while 19 had less than 3 deals in 1Q12. Are 60% of the states not even in the innovation economy?!?
While there were a lot of important topics addressed at the recent National Venture Capital Association board meeting in DC, the central item involved the recently passed JOBS (Jumpstart Our Business Startups) act by the Senate and supported by the Obama Administration and is now before the House. The act, which is strongly supported by the Republican leadership in the House, is bundled with a series of other important capital formation bills.
Some of the other topics we reviewed were:
- Crowd funding: seems to be an emerging reality that legislators are quickly going to school on. While there are concerns about potential abuses, a company’s ability to sell a modest amount of stock without registering but using trusted (i.e., regulated) intermediaries appears to be gaining wide support. Can eBay be used to facilitate this?
- Tax reform: notwithstanding the rhetoric around carried interest, and Romney’s tax returns, there is a sense that no real effort will be made to modify existing tax code before the national elections this fall.
- Cleantech: there does not appear to be real support now for new cleantech initiatives. The opposition of the utilities industry appears to have stifled any new regulations. Notably we learned of a mock cyber-attack on the power grid in early March – will be interesting to hear of their findings.
- Life sciences: there seems to be considerable government interest in crafting a set of new user fees which will be placed on life science companies. As if things weren’t tough enough…
- Accounting: for those CFO’s out there, it appears that the SEC will accept the International Accounting Standards board recommendations and that the US will move to be more in line with international jurisdictions. Additionally, and this is good news, the Financial Accounting Foundation (which oversees FASB but reports to the SEC) is preparing to make concessions for non-public companies by providing relief from needlessly burdensome accounting provisions.
As we were wrapping up the board meeting, we discussed the fall general election. Two interesting – non-scientific, non-authoritative – observations were made:
- If Obama wins, the Republicans will most like hold the House and take back the Senate, in which case absolutely nothing will get done for the next four years, or,
- If Romney wins, shortly into his administration he will realize that the situation is worse than he expected and he will (ironically) have to raise taxes.
On the eve of the historic Facebook IPO roadshow, I spent some time looking at the 4Q11 IPO data (courtesy of Campton Private Equity Advisors) this weekend. VC’s everywhere are hoping that Facebook will unleash of wave of public offerings and meaningfully improve investor sentiment towards venture-backed IPO’s. Arguably, though, Facebook is so unlike any other company sitting in VC portfolios that it may be hard to draw any immediate conclusions based on this IPO, which is why I was interested in looking at a broader cohort of recent IPO data to gauge where the market might be heading.
Somewhat surprisingly there were only 10 venture-backed IPO’s in 4Q11, led by Groupon and Zynga, which was double the number of IPO’s in 3Q11. For the entire year, there were 40 IPO’s which compared unfavorably to the 45 in 2010. The backlog at the end of 2011 was 57 venture-backed companies which compared nicely to the 44 and 28 at the end of 2010 and 2009, respectively. Unfortunately the average number of days in registration for these companies was 225; 8 companies have been waiting more than 365 days. Fifty of the 57 IPO’s in registration are raising between $50 – $150 million, only one is raising less than $50 million. The average amount of equity invested prior to IPO was $116 million.
More troublesome though was the post-IPO trading performance many of these 4Q11 offerings experienced. Three of these IPO’s are trading below the price they came out. Three of the 10 IPO’s in 4Q11 priced above their initial offering range, while four IPO’s priced below their initial range.
Here’s a bunch of other 4Q11 data:
- Average size of IPO was $256 million; Zynga was the largest at $1 billion
- Average IPO market cap was $2.5 billion; Groupon was the largest at $12.8 billion
- 50% of the IPO’s were in the IT sector, 20% were healthcare
- Median time of all 2011 IPO’s from initial equity funding was 6.4 years, an improvement from the 7.4 years for the class of 2010
- The average first day performance in 4Q11 was almost an increase of 16% although over the past 12 months, average IPO performance for all 2011 IPO’s was negative 6.4%
- Average revenue rate for 4Q11 IPO’s was $380 million; the median was $90 million (data skewed by the $1.7 billion revenue for Groupon)
- The enterprise value to revenue run rate multiple was 5.6x which makes the ~20x multiple for Facebook look very lofty indeed
- Only 4 of the 10 IPO’s in 4Q11 were profitable
- Average percentage of shares issued post-IPO was 19%, although Groupon was 5%
- Greylock had the most IPO’s in 4Q11 with 5
- Morgan Stanley was lead manager for 15 IPO’s last year; Goldman was second at 14, which was tied with J.P. Morgan
So what do I make of all these data? I think the IPO market is still pretty weak. The companies that are able to get public have raised nearly $120 million beforehand, are generating significant revenues, and still they sit in the queue for a long time, waiting for the IPO window to crack open. There are thousands of venture-backed companies launched every year and yet only 40 were able to go public last year. And even when they made it through that gauntlet, their stock prices tended to trade down.
The good news is that Facebook is unlike any other venture-backed company waiting to get public so none of these data matter.
On the heels of the fundraising data for 2011, PricewaterhouseCoopers and the NVCA released the 4Q 2011 and full year VC investment data. It was yet another year when VC’s invested ($28.4 billion in 3,673 companies) meaningfully more than we raised ($18.2 billion by 169 funds) – and as I have said in the past, this just can not end well. Observers of the VC industry keep referring to the industry as “burning off the overhang.” As a point of comparison, Dow Jones reported that VC’s invested $32.6 billion in 2011. Why do these sources report such widely divergent data – all the time?
Out of the blizzard of data I looked at this weekend, I thought I might pull out some interesting insights and trends which might be emerging. Feel free to challenge some of my conclusions.
• 4Q11 saw $6.6 billion invested in 844 which is up from $5.5 billion (861 companies) in 4Q10 although was down significantly from the $7.3 billion in 3Q11, which is odd given 4Q is usually greater given year end considerations and that 3Q includes July and August. Are we starting to see a tapering off?
• Seed investing in 4Q11 was a shocking 2% of overall activity (only $134 million in 80 companies – my bet is it is under-reported frankly) and well below the prior two quarters of 2011: 2Q11 was $412 million in 124 companies; 3Q11 was $223 million in 111 companies. Are the angels re-trenching? I have argued in the past that we may be seeing the “End of the Great Seed Experiment.”
• Interestingly seed and early stage investments in 4Q11 totaled $2.5 billion (or 36.5% of total dollars) in 444 companies (or 52.6% of all companies), confirming the rotation to seed and early stage investing and that those companies do not need that much capital.
• 238 software companies raised $1.8 billion ($7.4 million per company) in 4Q11 which was the single largest category. Second largest was biotech – $1.3 billion in 111 companies ($11.5 million per). Software captured 27% of all 4Q dollars invested, biotech was 19% of total. The smallest category? Business products attracted $24 million or 0.4% of total!
• There were 844 investments in 4Q11, the lowest level in any quarter last year. That has not happened in recent memory.
• $920 million dollars was invested in 4Q11 in first time companies which is 14% of all dollars invested. This compares unfavorably to 4Q10 of 16% and 3Q11 of 17.7%. Arguably being the first dollar invested in a company is the most risky round. Are VC’s cycling towards companies which have already raised capital?
• According to PwC only two states did not have one company last year which raised VC: Arkansas and Nebraska. Four states had only one company all year: Hawaii, Idaho, North and South Dakota.
• The largest “venture” deal in 4Q11 was the $250 million invested in Dropbox. The top ten largest deals attracted $1.2 billion in aggregate (or 18.6% of all dollars invested) for an average of $120 million per investment. Doesn’t really feel like venture capital to me.
• Lastly, the insufferable New York vs. Boston debate. In 4Q11 New England reported 107 deals versus 82 deals in New York, and 441 versus 379, respectively, for the entire year. New England captured $777 million dollars compared to $545 million in New York. Nearly 13% of all investments were in New England, almost 10% in New York metro area – which both look puny compared to the 273 investments in Silicon Valley (32% of total or $3 billion). Is Boston back? I don’t think it ever went away.
Interesting data. Mirroring the consolidation of venture funds, I think we are starting to see fewer entrepreneurs raising capital and there may be fewer “first timers” allowed in – particularly as the seed activity tapers off. Just a few thoughts.
To great fanfare analysts welcomed the VC fundraising data for 2011. You must be kidding me. According to VentureWire (published by Dow Jones), apparently there were 135 funds which raised $16.2 billion in 2011, as compared to 154 in 2010; Thomson Reuters/NVCA counted $18.2 billion raised by 169 funds in 2011, of which 49 were first-time funds. The NVCA identified 38 funds which raised $5.6 billion in 4Q11 alone. Of those 38 funds, 9 were “first time” funds and 4 were over $1 billion in size. Not bad you say.
So here is what the analysts don’t say. Let’s stay with the VentureWire data: of the $16.2 billion raised in 2011, $10.5 billion of that was raised by only 15 firms. That means 120 firms raised the remaining $5.7 billion for an average fund size of less than $50 million. That does not make sense to me. It certainly did not feel that robust to me and I am in the market every day.
But what does make sense to me is that the VC industry is both rapidly contracting and concentrating around a small fraction of the firms in the industry. The NVCA counts over 400 active members and presumes to represent more than 90% of the capital under management today. My guess is well below a 100 firms nationally can predictably raise a new fund in this environment.
Other NVCA data to ponder: in 2007, 237 funds raised $31.1 billion; in 2008 those numbers were 212 raised $25.9 billion; 2009 – 161 raised $16.4 billion; 2010 – 169 raised $13.8 billion – a five year low point which coincided with 10-year VC industry return numbers being negative. This year showed an upturn in overall dollars raised but it was driven by fewer, larger firms. Now that the 10-year industry returns data is once again positive, hopefully dollars will flow back into the VC industry.
What do you make of this? Is it good for entrepreneurs?
Thought I would share some of the discussion topics at the most recent director’s meeting for the National Venture Capital Association (NVCA) which was held in Washington, DC. Due in part to the venue, but also because of all of the very significant policy and regulatory issues swirling around the venture capital industry, many of the topics centered on the state of the VC landscape.
Suffice it to say the mood of the discussion was sobering and pointed to some very turbulent times ahead – for both the general economy and the VC industry specifically. In no particular order here are some of the key issues we covered.
- General consensus was that the “Gang of 12” or “Super Committee” meeting in Washington the past few weeks to hammer out budget and tax reforms will essentially fail. As is increasingly likely given the news over the last few days it appears there will not be a compromise and that the “forced cuts” will go into effect.
- A lot of hand wringing about the horrible state of VC fundraising. The most recent quarter results were a quarterly low point for the prior eight years (and yet the industry continues to invest at a $25-$30BN pace – that isn’t going to last and frankly probably ends badly). My personal guess is that the VC industry will struggle to raise $15BN this year – and much of that will be by less than a dozen or so firms.
- Considerable discussion around how the NVCA might help fix the broken IPO process. We developed the idea of an “on ramp” for companies below a certain size threshold, say $1BN in revenues, to transition to being fully compliant with regulations governing public companies. The NVCA will continue to push hard on this agenda item.
- Solyndra – agreed that we are probably past the half life of this story but unfortunately there are some in DC who will continue to flog this story for political gains. It appears that this is not a cleantech issue, not a DOE issue, but an Obama issue – and as such may not really go away until the FBI has completed its inquiry. Notably 42 companies were loan recipients and only 8 of them were VC-backed (and I am told most are actually doing quite well).
- Life science industry is in a world of hurt. The medical device sector raised capital in this past quarter at a level of 50% of the one of the lowest levels ever, that being in 2001. There has been a dramatic pullback in funding and rotation to anything that does not come within a country mile of the FDA – life science VC’s most favorite 4-letter word. Soon when bad things happen to you we will say “you were FDA’d…”
- Lastly we reviewed some fascinating data generated by an LP survey conducted this past summer. It showed that the private pension plans are still quite active investors. Notably of the $100BN raised by VC firms in 2000, only $46BN of that is managed by VC’s firms still in business. My industry is shrinking before our very eyes.
The day ended on a very cool note. Some of us had a chance to visit with senior members of the Federal Reserve. And while the specifics of the discussion are less relevant, I can report that there are very impressive conference rooms at the Fed. There were spectacular posters of every type of US scrip since the start of the country. And you thought entrepreneurs and VC’s have it tough during these times; you would not want to be the good people trying to navigate all these issues in DC.
The third quarter venture funding stats were released today by National Venture Capital Association (I am on the NVCA Executive Committee so am a big fan of their data) – always makes for entertaining reading. It is a little bit like looking for clues, especially in this market to help explain what the hell is going on out there. ..
The overall investment pace was quite impressive given that the quarter included a wild August in the stock market and the vacation slow down; investments totaled $6.95 billion in 876 deals. In 2Q11 there were 1,015 deals which raised $7.88 billion but in 3Q10 there were only 850 deals which raised $5.31 billion, well-below this past quarter. It feels like the VC industry is on pace to invest close to $28 billion this year, which continues to baffle me as VC’s will struggle to raise $15 billion in new funds. This will be the third consecutive year when the industry invested meaningfully more than it raised. That will probably end badly.
Couple of interesting observations I pulled out of the data with my calculator…
- Notwithstanding the buzz around seed investing, as a percent of total activity it was down notably this past quarter – only 3% of investments ($178 million) was seed versus 6% ($303 million) in 3Q10. There was $403 million invested in seed deals in 2Q11 more than twice this quarter.
- Average size of each seed round was $2 million – doesn’t really seem like seed investing to me! Average size of first rounds (“Early”) was $5.7 million.
- Life science investment activity is decreasing substantially – in large part to capital intensity and regulatory uncertainty. I would argue that as larger life science funds pull back or give up altogether, early stage investing will quickly follow suit. In 3Q11 life science investment was 28% of the total activity; this was 32% in 3Q10. Watch for this to get worse before it gets better.
- Since 2Q11 life science investing decreased 13% on a dollar invested basis. Cleantech also witnessed a meaningful decline.
- Software rocked this quarter – $2 billion was invested in 263 deals. Quite clearly investors are rotating out of sectors with long and uncertain development pathways to ones with revenue and nearer term liquidity options.
- An interesting VC risk barometer is the amount of “first time” financings and the news is not so good here. As a percent of all dollars invested, only 17% were “first time” ($1.2 billion) versus 20% in 2Q11 and 24% in 3Q10 – clearly a negative trend and most likely reflecting increasing risk aversion and many funds who fear not being able to raise new funds, just doing what looks safe. It is even more dramatic when focusing on “first time” seed investments which were 10% in 3Q11 down from 22% in 2Q11. My guess is we are beginning to see the end to the “Great Seed Experiment” – now that many companies seeded one to two years ago are hitting the wall – not every seed will raise a Series A.
I could happily drone on with more “fascinating” insights in the funding data but will pause there. Clearly VC’s are increasingly drawn to businesses which can drive near-term revenue (consumer internet/social media) and/or don’t have open-ended product development pathways (life sciences/cleantech). External forces like the hostile FDA or non-existent IPO markets are conspiring against certain VC-backed companies.
Ok, one more observation which I have been reluctant to even comment on – the ceaseless New York versus New England comparison. New York killed it this past quarter – $891 million invested in 103 deals, even better if you throw in metro Philly. New England’s results – $586 million and 108 deals – not so great. But hold on – year-to-date New England invested $2.36 billion in 324 deals as compare to New York’s $2.19 billion in 289 deals. While we very much respect the New York phenomenon – one of the Flybridge partners is there every week – hell, I am a Mets/Giants/Knicks/Islanders fan – this is a marathon, not a sprint. Anyway we think both markets can peacefully co-exist and in fact are near-perfect complements. They are only 180 miles apart.
I spent much of this past week in London – save for an afternoon meeting in Zurich – and was quite surprised by what I saw. The English have always impressed me with all their stiff upper lips (I grew up in Hong Kong when it was still an English colony). With the broader Euro zone upside down and potentially unwinding, Greece and Portugal looking over the bankruptcy precipice, civil unrest in most European capitals, and the resignation of their Defence Minister in scandal (they spell it funny there), the Brits continued to go about their merry ways.
While there the September unemployment numbers were released: the unemployment rate now stands at 8.1% – a full percentage point below the US rate. Amongst all the hand wringing was a sense that the UK economy was doing ok, thank you very much. There was evidence of reasonable consumer strength and while prices were ridiculously out of control – it seemed as if every five minute taxi ride was 15 pounds ($24) – there were no shortages of Bentleys, Porsches, Bugattis and Lamborghinis. It could also have just been that all the Russian Oligarchs and Middle Eastern Sheiks decided to go for a drive at the same time.
One of our biggest issues in the US is the absolute freaking dearth of IPO’s – extremely frustrating and disheartening – so imagine my intrigue with the article titled “Newcomers Provide the Only Buzz for Overtired AIM (stock exchange)” in Thursday’s Financial Times. I expected yet another article lamenting the absence of public offerings in the UK just like in the US. Point of fact there have been 22 IPO’s in 3Q11 in the UK. Those companies raised 205 million pounds and covered a fascinating range of industries: the obligatory internet/ biotech/mobile marketing companies but also water purification, African agricultural and coal importing companies. Quite impressive I thought. Interestingly though the AIM was not the most active stock exchange in Europe this past quarter – Warsaw saw 54 IPO’s on its stock exchange.
One other set of observations – perhaps more troubling – was how many of the sophisticated financiers I met look at the current US situation. Notwithstanding the vast pools of capital across Europe all struggling to find investment returns greater than the 3-month LIBOR of 30 basis points available today, there was a collective apprehension to invest in the US innovation economy. That is simply baffling – we have a significant PR problem – if we cannot look more attractive than investment opportunities in Europe’s backyard (Greek bonds anyone?), that is a problem. The protracted infantile budget debate this summer hurt us more than we perhaps realize.
The innovation economy is now comfortably a global phenomenon. We all know that but it is always entertaining to be reminded of that when traveling abroad. The problem is we should own it outright, and after a week in Europe, that just does not feel like the case right now.
Two days ago I was on Bloomberg TV’s “Street Smart” with Carol Massar to discuss “Getting Boston’s Edge Back” – which focused on how Boston was doing but quickly turned into a discussion on the race for the next Facebook. As I approached the set I felt confident that I could tell an enthusiastic story about Boston’s innovation economy until Carol asked me why Boston has lost so much market share to the Valley!
I think I did a reasonable job defending Boston. While Carol was great, my biggest issue with the show was how it showed up on YouTube – “Greeley Says Boston VC Not Focused on Social Media” – which is nothing I ever said, quite the opposite actually. I stressed repeatedly that entrepreneurs in Boston solve really hard problems – I even used the word “intractable.” I referenced cloud computing, storage, infrastructure, robotics, life sciences as sectors we excelled at – although I did acknowledge that we might be guilty of selling out too early.
Boston has been #2 to the Valley for a long time in VC activity – admittedly even a distant #2 – both in terms of dollars invested and number of companies. We also are a smaller geography with crummy weather 6 months a year. In fact – and quite timely – late last week 2Q11 funding data was released and there are some interesting data there:
- Per CB Insights VC investment in Massachusetts in 2Q11 was $1.1 billion in 89 companies, up from $719 million and 85 companies the prior quarter, and up from $689 million and 85 companies in 2Q10
- Nationally $7.6 billion was invested in 768 companies (this continues to baffle me – VC’s are investing at a nearly $30 billion annual pace but we will only raise around $15 billion this year in new funds)
- 12% of all investment was deemed to be “seed” investing – a five quarter high
- Clear evidence of consolidation as California/Massachusetts/New York companies accounted for 74% of all dollars raised versus 69% in prior quarter (or 57% in 4Q10)
- Nationally 18% of dollars invested were “seed/Series A” versus 21% for “Series B”
- Internet was 36% of all dollars invested with healthcare (25%), mobile (7%), energy (6%), non-internet software (6%), and hardware (5%) rounding out the balance
The diversity of industries represented in the Massachusetts data was impressive, and while some people wring their hands about us being #2,this diversity augurs well for a healthy VC marketplace in the future. Why do I say that?
- In terms of number of companies which raised capital in 2Q11, healthcare was 34% while internet (27%), non-internet software (13%), mobile (8%), energy (4%) and industrial (4%) were some of the other categories
- On a dollars invested basis, healthcare jumps to 52% of the total while internet (24%), non-internet software (5%), mobile (5%), energy (6%), and industrial (3%) fill out the balance
But what I often point to is the fact that of the $175 billion managed nationally by VC’s, the local VC community manages approximately $35 billion or 20% (more than the 15% our local companies attracted). We continue to have a strength of VC activity which is critical for the future health of the Boston innovation scene.
But we can not stop aspiring to launch the next Facebook here. Let’s not let the next great one get away – unfortunately it may just not be in social media/commerce.