"The Changing Face Of Venture Capital - Where Will The New Capital Come From?" by Geoff Robson

As we continue to see many exciting advancements in the entrepreneurial ecosystem in our region as well as in the state as a whole, I came across the following article that contains a number of important “nuggets” regarding venture funds.  A few particularly important points in this that were worth highlighting follow.

1. Those with experience in the venture industry will tell you that the typical portfolio (made up of 8 – 10 companies on average – more in very large funds) contains a few companies that are total losses, a few companies that provide a return of investment, and a few companies that provide a return on investment.  Simply put, a small portion of the portfolio provides the greatest return lifting the returns on the total portfolio to the annual target of 25% - 30%.  Experience in the venture industry and specific market segments is a clear differentiator among funds who perform in the top quartile.
2. This article indicates that those returns have been shrinking over the last decade to lower levels much like the general population has seen in its retirement portfolio.  As a result, the overall venture industry is shrinking.  There are fewer funds today than there were just a few years ago by a significant percentage. You see VC shrinking (by capital raised and number of funds) for a couple of reasons. Less returns means less capital for reinvestment in the VC fund. Second, the loss of value in the public markets means that VC, a private source, increased as a percentage of the total fund. Most capital managers don’t want VC and other higher risk funds to represent too much of their portfolio.
3. I hear many venture fund managers today that are focused on a couple of key points among others: Proprietary deal flow and how their team can add value beyond just funding.  This idea of proprietary deal flow is a critical one – they want to source deals that fit a very defined investment profile and then stay very close to the opportunity as the investment round is sourced.

As this article points out, a number of leading institutions (and some very smart people leading these) are working to fill the gap created as the industry pulls back.  I firmly believe that you will see these institutions partnering with people who have experience in this space.  This was a broad practice among the new TNInvestco funds created by the State of Tennessee.  Many of those fund managers, including those with industry experience, reached out to partners who could fill gaps they may have had on their management teams.  I have had the pleasure of meeting a number of these people whom are not only really smart people  but truly good people to work with.  As a matter of practice we encourage among our client companies, it is always good to see this.  Any institution considering launching a new venture endeavor would be wise to practice this as well.

 Click here for the link to the article---->

Comments

[Bob Wilson]

Strong points by Geoff - I have come to trust his judgement when it comes to capital raising - I would highly recommend his expertise to any entrepreneur that needs guidance with the capital raise process - he knows it well - Thanks Geoff