VCs in bad habits
By Paul Mackintosh - 11/02/13
It’s a tale of two asset classes this week. Preqin’s FY 2012 buyout data shows that the North American buyout heartland hit its post-Lehman high last year, with 1,590 announced deals worth US$152.3 billion, swelling the global total to $264.8 billion from 2,900 deals. In stark contrast, global venture capital deal value for 2012 fell 22%, from $50 billion in 2011 to $39.1 billion by Preqin’s figures. Much-aired data from the National Venture Capital Association and Cambridge Associates indicates a 6.1% average on annual VC fund returns in North America for the last decade through Q3 2012 – worse than typical stock index performance over the same period. Venture had a bad year, while its rival asset class seems to be off the danger list and enjoying rude good health.
But I suspect that recent events have only confirmed VCs in bad habits.
The biggest – and easily most controversial – exit of 2012, Facebook, illustrates the problem. Come its $16 billion May IPO, Facebook had already grown so big that only the top VC echelons were in a position to do anything with it in later stage rounds. A whole new ecosystem of private-stock trading platforms grew up drawn by the lure of pre-IPO Facebook shares. And although its stock performance post IPO has since improved, Facebook’s sudden slump after listing, amid widely-publicized technical missteps by NASDAQ and preferential information disclosures to institutional investors, went far towards discrediting the entire IPO process. After Facebook, it is hard to imagine technopreneurs and star VCs enjoying quite the same culture hero status as they did a decade or so ago. Instead, they were lumped in with the broader resentment against financial greed fuelling the Occupy protests.
The Asian tilt in venture investing is also a trend Western VCs need to address. Of Preqin’s top ten largest venture deals in Q4 2012, three were Chinese and one was Indian. Asia, whose IT and consumer electronics giants loom ever larger over the global economy, is clearly no longer a small frontier market for venture, but rather a critical one that major VC firms need to get right. Yet LinkedIn, Facebook and a whole series of Web 2.0 IPOs kept US VCs riding a bubble straight up above their own homeland, only to be dropped when it burst in May 2012.
Facebook’s listing tarnished the image of venture exits, but there are few signs that it lowered the American VC community’s valuation expectations or broke habits lingering from the first tech bubble. Instead of assessing how to adapt their business model, compensation structures and local NASDAQ focus, VCs are that much more likely to hang on and wait for the Next Big Thing, the next Facebook. While some of its oldest practitioners preach a return to the approaches and expectations of the early 1990s, or even the 1980s, US venture still seems content to live on and for memories of 1998-99.