Venture Capital Today A Perspective
Date: Wednesday , February 01, 2012
Storm Ventures was founded by a seasoned group of industry veterans with the common vision of sharing their collective experience, passion and energy to help talented and driven entrepreneurs build great companies of enduring value. With over $500 million under management, Storm Ventures focuses on seed and early stage information technology companies which best leverages our operational experience and global network. Its limited partners include many prominent financial institutions, as well as over a hundred senior executives who have had successful careers in technology companies.
To understand Venture Capital today, we need to first look back at the past performance of this investment class. Historically Venture Capital returns have been on average 800 basis points better than the stock market. In other words when the NASDAQ, DJIA or S&P 500 were delivering 12 percent to 15 percent returns then the Venture Capital industry in aggregate was delivering 20 percent to 30 percent. Now those were average returns for the whole asset class with some funds delivering returns as high as 80 percent IRR’s and correspondingly there others with returns that were lower than the average or even negative. On the whole, however, returns in Venture Capital were better than what you would have received by investing in bonds or stocks and the venture capital industry therefore attracted more capital and more managers.
By 2000 assets allocated to Venture Capital had grown to a peak of over $300 billion (worldwide) managed by over 1,000 venture firms in about 1,800 funds (Venture firms often have multiple funds). Then in 2000, we had the dot com bubble burst and Venture returns took a tumble, as did the NASDAQ, which peaked at 5,132 in early 2000. In 2008 we saw another big correction in the stock market and the beginning of the “great recession”. The first decade of the 21st century (2000 to 2010) has been tough for investors in all sectors; Bonds, Stocks, Real Estate as well as in Venture Capital. As returns fell, venture capital assets shrunk from the peak of $300 billion to about $180 billion and the number of venture firms has dropped from over a 1,000 to just a bit over 794, of which 462 were in the U.S. Venture Capital has done much more than generate returns, it has helped create new products, services and industries that fundamentally changed how we live our daily lives. For example, in the old days to create a major corporation, you would have to have your own manufacturing and your own sales force in the major markets of the world therefore requiring more money additional time to build a $10 million, $100 million or billion dollar business.
In the four decades starting in 1960’s innovations funded by venture capital delivered very impressive amounts of computing horsepower, terabytes of storage and gigabytes of bandwidth all at very low costs. Cheap and ubiquitous, compute, storage and bandwidth enabled whole new business models. Content became digital and did not need a physical medium for delivery. The Internet enabled producers, manufactures and developers to connect with and sell to customers, and consumers quickly, cheaply and efficiently. The result as we have all seen is a flat hyper-connected world. Productivity and efficiency have increased and it is now easier and cheaper to get a new idea to market. Innovation continues unabated. Capital too is plentiful, both from VC’s and a growing breed of investors known as Angels.
The Venture Capital industry is evolving and changing as well and there are three BIG changes in Venture Capital that I will highlight.
First, innovation has become more global and is no longer the exclusive domain of Silicon Valley and Route 128 in Boston. Many of the Silicon Valley funds have opened offices in China, India, Israel and Vietnam. As a result VC funds have had to provide capital to these entrepreneurs in other geographies. Second, the Venture industry has matured and has become more specialized and institutionalized. We now have VC funds that have a sector focus or a stage focus or a geography focus. When you are looking for Venture funding, entrepreneurs should make sure they are matching their needs with the VC funds focus. Some of the tech sectors that have funds focused exclusively on them are; Life Sciences, Biotech, Cleantech, Digital Media, SaaS.
Thirdly, the industry has become more efficient and more responsive to the needs of the entrepreneur as a result of greater professionalism and greater competition. Now most VC’s view themselves as service providers whose job is to provide advice and counsel, this adds value to the enterprise and to the entrepreneurs and to bring more than just cash to the table. Many VC’s tend to be successful entrepreneurs themselves and can therefore relate to the challenges faced by entrepreneurs and can help with recruiting, partnerships for sales and distribution and strategies to finance and build a large successful enterprise. Entrepreneurs should look for a VC that not only is a source of capital but also has deep industry knowledge and a broad network.
Ten years ago we at Storm Ventures were investing in Bandwidth, Mobility and Intelligence. We were looking for companies that could help deliver MORE Compute, MORE Storage and MORE Bandwidth. Today we are benefiting from these investments and those prior innovations have built some great infrastructure that enables new waves of innovation. Looking ahead the focus is not on MORE but rather on how you can do MORE with LESS. Investments in Virtualization, Cloud, Mobility, SaaS are therefore of higher interest to us at Storm Ventures as they can deliver increases in productivity and efficiency for enterprises and consumers at a lower cost.
It is an exciting time to be an innovator/entrepreneur. Just make sure that you are addressing a market that is large, have some expertise and knowledge of that market domain and recruit a great team of engineers and marketers who know how to leverage the platforms for manufacturing like Foxcon, HTC and more. WIPRO, Infosys for software development and testing, Computing (such as Amazon Web Services /AWS-EC2, Google App Engine, Microsoft Windows Azure, Rackspace Cloud); storage (such as Microsoft Windows Azure xStore, AWS S3, Dropbox). You should also understand the platforms for marketing, distribution and word of mouth endorsements which are at very large scale (Facebook, Twitter, LinkedIn, Google+) as well as Sales platforms that can help you sell your product or service(such as iTunes, Amazon, eBay, Force, Android Marketplace).
These platform partners give you and your business the ability to scale quickly at low cost without compromising quality and to do it all on a slim budget.
It has never been easier to start a company but it has become more competitive than ever before. Success depends on execution which depends on having the right team and the right strategy. Not easy unless you and your team know how to leverage the ecosystem.