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Venture Capital Cracking

********  IvyPlus March 23rd  Fund Business Development Event, http://bit.ly/bW0DIt *******

Venture Capital Funds (VC) continue to see their fortunes slide. They are at a severe disadvantage vs. other alternative investment funds due to the extent of their lockups, lack of liquidity, high risk, and present regulatory environment which diminishes the value of exits.  8.2% VC return on 10 year lockups are incredibly damaging from the eyes of the investor class who have a wide array of risk free options and better risk adjusted options with far higher returns such as hedge funds with 20%  targets and monthly liquidity.  On a risk adjusted basis, VC should outstrip hedge fund returns dramatically but they don’t.   Regulation will continue to increase as regulators see VC as another form of private equity with similar risks of over-leverage, speculation, etc .  Moreover, for funds that depend on capital calls, there is more LP resistance to fulfill obligations. 

The NVCA has published a widely quoted study stating Venture-backed companies employ 11% of all Americans in the private sector. Yet this empty metric doesn’t differentiate between the jobs created by VC backed firms vs. those acquired by the same firm. Nor does it differentiate between the age of the VC backed firms or whether they are public companies.  According to this study, HP and other firms that have grown dramatically through acquisitions of major competitors lump together acquired jobs and "created" VC jobs for a nonsensical metric.  Reviewing the study in more detail shows that VC backed firms peaked in creation and backing at the time the internet bubble burst and are now operating at 33% of where they were. VC backed firms and job creation since their nadir in  2003 barely track the U.S. population increase.  It is questionable that the formal VC industry needs to remain at its current size as the golden era of VC may be looked back upon as the time when VC was 5% the size of it’s peak yet churned out winners like Apple Computer and Hewlett Packard.  It is really a question of what have you done for me lately.

An argument for reducing the size of VC is (1) the cost of software startups have broadly diminished due to the availability of global sourcing for cheap software and project management talent and micro marketing capability for customers created by the internet.  One well known VC has said that the cost of marketing niche products in the ’80s could be as much as $15 million to 50,000 potential customers, today that cost is 10% of what it was BEFORE INFLATION ADJUSTMENT.  (2)  Likewise, the need for clean tech is diminished due to the global warming crackup.  With many state coffers empty, it will not be surprising if states roll back their tax incentives for clean tech as happened in the late ’70s and early ’80s with alternative energy.  The empty statement that VCs provide 11% of all jobs is similar to pre-global meltdown statements of real estate and the stock market values always go up.  Clearly changes will come and hopefully government will focus on ways to make credit cheap for job creators and emerging companies reducing their overall cost of capital and the need to sell equity at a dear price.

You can find the link to the NVCA study here, http://bit.ly/9ZGaNM

The Wall Street Journal reports that VC syndicate failure is increasing.  Again, LP cash is diminishing with resistance to capital calls as more LPs see the risk in litigation and penalties as more rewarding than the chance of losing all their capital in funds where the dynamic for success is diminished i.e. lack of leverage in the marketplace and side to side stock market performance. " of the 9,267 closely held companies in the U.S. backed by venture-capital firms, 59% have an investment syndicate. Such alliances, which aren’t new, allow venture-capital firms to spread the risk of investing in a start-up, though some firms demand at least a 20% stake."

More info here, http://bit.ly/9C9cq1

 

 ********  IvyPlus March 23rd  Fund Business Development Event, http://bit.ly/bW0DIt ******

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