It’s not hard to find people willing to write the narrative that “venture capital is not an asset class” or “venture capital has performed terribly.”
The most recent was 18 months ago or so called The Kauffman Report. It had an influence on the people who fund our industry in a negative way as many asset managers who fund our industry read this flawed report. That’s a shame because many of these people missed out on what will be a few great VC vintages.
The biggest problem with the report was that it pulled together data from more than a decade ago to proclaim what the future of our industry would look like. I wrote about this in a blog post last year titled “It’s Morning in VC” but I never made the full deck available until now.
I presented the deck below – which was prepared with the great help of Upfront Venture’s Principal Jordan Hudson – at Dave McClure’s must attend event called PreMoney with much more data and narrative than I had in my blog post. I saved it mostly for LP discussions that I had over the past year.
This year an associate from Upfront Ventures – Glenn Poppe – helped me pull together more information about how our industry is changing. I hope to publish that deck and a full write up in the next 10 days in partnership with Dan Primack at Fortune (if my write up doesn’t suck, I guess ;-))
Having worked through the data with Glenn I am even more optimistic about venture capital than I was even a year ago. Here is a preview of what we found & what we will publish:
1. The opportunity set is much bigger than ever (50x more users, 10x time online, mobile, social, credit-card enabled, global) … when things work they work faster and at an unprecedented scale. Think DropBox, Airbnb, Pinterest, Maker Studios, SnapChat, Tinder).
2. The costs to start are much lower than ever (90% reduction in infrastructure costs to start a company through open source & web services) and large companies being created in many geographies.
3. Time to massive revenue is the most compressed in history due to scale and Deflationary Economics.
4. Companies are now raising much more capital in the private markets now before they go public. This is the opportunity set for venture capitalists.
5. When companies DO IPO they are worth much more at IPO time than in the past. Thus is a key point. More value is captured more by VCs prior to an IPO. VCs used to IPO and then sell. Now they are funding & holding.
6. This has led a number of successful traditional VCs (and soon Micro VCs!) to raise “opportunity funds” to fund the prorata participation of their best early-stage investments. Other VCs have raised “growth funds” to back the companies that are scaling fastest.
With private markets capturing more value in the future and continued disruption of every industry – can LPs afford NOT to be long in Venture Capital?
Of course the concentration of capital in growth firms and the intense competition to fund the best deals leads to some risks. These are most notable in late-stage, D-round, investments. And of course new entrants are competing to capture the private-market value (hedge funds, mutual funds, corporate funds).
But I’ll save this data and analysis for the next post.
Please don’t forget to subscribe to my newsletter to make sure you get the deck next week when I publish it!
(Cross-posted @ Both Sides of the Table)