There is an intriguing article in last week’s issue of Forbes Magazine – Venture Capital’s Coming Collapse – an excerpt:
The venture capital industry is staring at the most vicious shakeout in its history. Returns are pathetic for most funds, the public offering pipeline on which venture depends for its exit strategy is clamped shut, and with the shares of many big publicly traded tech companies swooning, those firms are less likely to buy up promising upstarts.
I have been reading many pessimistic articles like this and others (see this interview with Bill Stensrud in which not only is the industry dead, but the cause is that innovation is dead, for now, too – YIKES! Should I have an aneurysm now, or later?!), and being a new student to the world of venture capital, my thesis is that neither innovation nor venture capital are dead; like all industries, they are in a bit of a nadir presently, a period of rapid change and re-invention. And shakeout - I think that word chosen by Forbes is apt.
I recall hearing a keynote speech given last May by Ken Pelowski, a managing partner at Pinnacle Ventures in Palo Alto. Ken’s thesis was that there were only 5-10 top VCs in the world, they had been on the top for a very long time, these were the only guys making any money in the VC industry, and there was little/no chance that anyone could unseat them. I remember being shocked by the hubris of his claim – especially because it seemed clear that he put his firm in that lofty firmament – and I also recall thinking, “I gotta start blogging.”
I agree with Mr Pelowski about the top quartile of venture capital firms making the lion’s-share of the money – this is is almost irrefutable, and has been for some time (see chart below). But I strongly disagree with his idea that the same firms always will be on top – and that is the shakeout I believe we are witnessing right now.
In sports, there are teams that are on the top and teams that are on the bottom – and for a team with great management/roster, or during times of slow innovation, a dynasty can be built over a period of time; but all dynasties eventually come to an end. So it is with most industries – choose your favorite example – in retail, technology, financial services, or heavy equipment. It is the same in venture capital.
In venture, I believe the changing of the guard is being brought about by a few major disruptions and the passage of time. The disruptions that I can see are two major money sink-holes – cleantech/greentech/alternative energy and biotech/life sciences.
For biotech/life sciences, I don’t have solid data (I will keep my eyes peeled to bolster my hypothesis), but there is a general consensus that innovations are hard to come by, they are extremely expensive, and they take a very long time materialize if they ever do. Anecdotally, I have seen more Series E+ rounds, and more $200M+ total investments in biotech than any other field. Sure, there are hits – but not enough to keep many firms alive that focus solely on this specialty. In the last 15 years, many VCs have dabbled, or diversified, into biotech; it strikes me as a field that punishes dabblers.
Even worse is what is happening in the wider industry of cleantech/greentech/alternative energy. Here you have the train wreck of poor market analysis (in most instances, the crises foretold by the doomsayers are way overblown, if not absolutely false) + governmental intervention (tax “stimulus”, poorly though-out regulation, and do-goodism) + investment in what is still, in many instances, just basic research (the stuff that should still be going on in the lab, not in a commercial setting). Again, anecdotally, I have seen more rounds of larger amounts of money than almost any industry. One person painted the picture thus: cleantech has all the downside of biotech investing, requiring loads of capital and a long time, PLUS the downside of technology investing, where you have executional risk of selling into tough markets once you have a product. I wish I had been smart enough to come up with that.
Add to these sink-holes the passage of time, wherein once au currant investors have gotten older, often losing their “sniffer”, or their curiosity, or gut, or all the above; and then you have a changing of the guard (just watch this video of John Doerr crying about how we are destroying our planet – is that detached, unemotional investing on his part?). Who will the next kingpins of venture capital be? No way to know until you see their average returns over 20-30 years. But you can bank on there being a new set of leaders with new innovations. What will those innovations be?
I don’t know the full answer to that question, but in my next post, I plan to dig into what I believe to be one of those innovations.