We didn’t think the venture capital and startup communities could become more pessimistic than they were last year – but we were wrong. Normally known for their optimism, VCs and CEOs of venture-backed startups were loathe to predict upswings in investment levels, fundraising, IPOs and the economy for 2012 – and they were right. So it stands to reason that the realism that permeated last year’s predictions would carry over into this year. Even fewer respondents to our 2013 VentureView Predictions survey see more of anything in the coming year. Consider the following:
- Last year 48 percent of VCs thought IPO volume would improve; this year 40 percent expect more IPOs
- Last year 32 percent of VCs though venture investment would increase; this year 27 percent see more investment next year.
- Last year 27 percent of VCs thought there would be an increase in firm fundraising; this year just 14 percent see increases
- Last year 47 percent of VCs thought the economy would improve; this year this year only 42 percent think so.
The CEOs mirror these prediction trends – with 5-10% of respondents less bullish than in 2011. So what is happening?
The timing of our survey should not go unnoticed. Taken in the last week of November/first week of December, the reality of a dive over the fiscal cliff was front and center in the minds of many. What drives the economy, drives the public markets, which drives VC fundraising, which drives investment… and so on. What is abundantly clear to us at NVCA is that Washington politics can either prop up or wreak havoc on the venture capital market and nowhere is that more obvious than in these survey results – with one exception: The Power and Enthusiasm of Startup Companies.
Our 2013 survey again predicts a large majority (83 percent) of venture-backed companies increasing headcount next year. Seventy eight percent of CEOs surveyed expected their company valuation to increase. And 67 percent expect to increase their global activity. It is this optimism that brings VCs to work each and every day. Entrepreneurship and innovation always prevail.
One final note: We must be careful not necessarily to equate “more” with “better”. In some cases, less is better. As the size of the venture industry continues to decrease, returns are poised to improve. In some investment areas, we need to pull back the reins as we know full well that industry cannot scale to monumental levels and still perform in a manner that is acceptable to our limited partners. So while, the overall predictions are for “less” in 2013, it might be the beginning of "better" for the foreseeable future.
You can see all of our predictions and data here:
Press Release Summary
Researchers and journalists have often noted that it takes at least three separate events to indicate a trend. If so, today we can say officially that we are seeing an alarming trend in the area of life sciences investing with the announcement that Scale Venture Partners will cease healthcare investing permanently. This exit follows the announcement last week that long time, established funds Morgenthaler and Advanced Technology Ventures would be effectively spinning out their healthcare investment practices and the announcement just over a month ago that Prospect Ventures would not raise a fourth healthcare fund and return committed capital to limited partners. Here we have three different instances of firms addressing their healthcare investment practices - and presumably their limited partners appetite for the vertical space - in different ways. Any one of these announcements alone can be explained away by individual firm decisions but taken together they validate a major investment shift with a potential long-term impact.
While clearly there remain well-established, pedigree firms that are committed to the life sciences space, the strategic decisions of these well-respected venture firms to move out of healthcare investing reflects significant challenges with the length of the investment horizon and capital requirements to successfully invest in biotechnology and medical device companies. In a Scale VP blog post today , managing director Kate Mitchell specifically states that "...the vagaries of the FDA and the resulting increase in time and capital needed to take these companies through to a real exit doesn't fit our mid-stage fund strategy any longer." Translated: Despite the tremendous innovation within the healthcare space, the process just takes too long.
It has been just over a month since NVCA's MedIC coalition released our Vital Signs Report which found that venture capitalists plan to decrease their investment in the life sciences sector over the next three years. These three instances of venture firms exiting the sector confirm the survey’s results. We now have "a canary in the coal mine" alerting legislators and regulators that FDA reform is more imperative than ever. We need a well resourced FDA that can be efficient, predictable, transparent and safe. And the time to reverse this trend is now.
Today's announcement that there was zero net job growth last month is troubling indeed. I am very interested, as is the rest of the country, in the President's planned jobs speech to Congress next Thursday. One the areas I would expect him to highlight as having the most potential for job growth is the start-up community. As the country as a whole struggles to avoid a double dip recession, venture-backed start-ups are pulling more than their weight in hiring Americans. At StartUpHIre.com, an online jobs posting site for venture backed start-ups
, there were more than 14,000 open jobs listed in the second quarter of 2011. From August 1, 2010 to August 1 2011, more than 40,000 jobs were posted on the site. And that is just a percentage of the total venture-backed universe.
Indisputable fact: Every time a company receives venture capital funding, jobs are created. And as these companies grow, so does employment, especially at those companies that go public. While venture-backed companies do fail and go out of business, the net job creation is always positive. As we approach Labor Day and search for a bright light in these uncertain times, it is becoming more apparent how vital these emerging companies are to the US economy and our recovery. Public policies that support these companies are so very important and, as Congress returns from its summer recess, we hope their priorities will be in the right place.
This week's news about the suspension of operations and impending bankruptcy of Solyndra, a venture-backed solar film company that received sizable loan guarantees from the federal government, came as little surprise to the NVCA, but not because we had any advance knowledge of Solyndra's plans. Rather, we have been anticipating failures -- and sizable ones at that -- in the clean technology space for some time. Venture capital investment is predicated on failure because of the high risk nature of the companies in which we invest. This reality is even more prevalent in emerging, disruptive technologies such as clean tech. We should expect more failures in the months and years ahead as we test innovative technologies and business models. But, more importantly, we should also expect significant successes.
Venture capitalists and entrepreneurs are known for learning from their mistakes; they thrive on it, in fact. Recent coverage of Steve Jobs' career and his failures along the way speak to this phenomenon directly, but it applies to every single start-up company ever funded. In wake of Solyndra, it is critical that the federal government take this reality to heart and continue to support clean technology through loan guarantees and R&D funding. If the venture capital industry jumped ship at the first sign of failure in other sectors, we would be living today in the dark ages technologically, socially, economically.
There is much innovation and much success in our future in the clean tech space, with countless companies and technologies being tested in the market. Every new clean tech company equates to new jobs and new opportunities to reduce our reliance on foreign oil and save our planet. Venture capital investment has never been for the weak of heart - and, after this week's news, we expect clean tech investors to continue their down their current paths without pause. The United States needs to grow our economy, foster innovation, and remain competitive with foreign countries. To do so our government must also move decidedly forward in support of the clean technology industry.
We have been getting a large number of queries regarding how the debt ceiling, the S&P downgrade, and the market volatility are going to impact the venture capital industry. First, we need to clarify the cause and effect that is taking place. The seemingly unending and fractious debt ceiling negotiations caused the S&P downgrade which, in turn, is one of a few factors that is causing the current capital markets instability. Recently, I spoke about how the debt ceiling agreement is poised to impact venture capital here. While the S&P downgrade itself does not directly impact venture capital, the capital markets uncertainty caused by the downgrade is indeed problematic for venture capital. Why?
Over the past several months, we have begun to see a marked increase in IPO registrations for U.S. venture-backed companies. Today, that number stands at 57 - the highest level of registered companies since before the financial crisis of 2008. These companies are quality candidates that have every intention of becoming public entities. However, in the last week, the brakes were harshly applied to the steady momentum we were experiencing. No company is going to go public when there are 500 point swings in the market on a daily basis. Several companies have postponed planned offerings and others will likely wait out this storm. This environment creates delays we do not need.
At the same time, larger corporations who are buyers of venture-backed companies, are watching the price of their stocks rise and fall and quite possibly may slow down their acquisition strategies to understand better their own financial positions before spending cash. Thus, the current class of companies that are ready to exit will remain in the venture portfolio a little longer, which could impact venture returns.
In a normal environment, the venture industry could shrug off this delay, but we are coming off of a significant holding pattern for exits from the financial crisis. Venture firms that were waiting out the last crisis for a better market and thus better returns are now forced to wait out yet another set of market bumps before fundraising.
Hopefully the market will stabilize and companies can continue to go public again very soon. Otherwise we could see a repeat of 2008 when the IPO window closed completely, a shutdown that today would seriously jeopardize the venture capital industry and the entrepreneurial companies in which we invest.
Any signal that Congress can send to the investing public that meaningful progress is being made on the deficit will be extremely helpful to establishing some stability in the marketplace. To achieve this however, there must be bi-partisan support for policies that support economic growth. Like the rest of the America, we stand waiting and hopeful that this can be achieved.
Our Monday meeting in July is with Ketan Patel, Principal at New Venture Partners where he focuses on corprorate spinouts, enterprices security, mobile media and security, ad-hoc wireless networking, and communications. Having joined New Venture Partners in 2006, Ketan previously worked in a variety of operational roles in the semiconductor industry, encompassing startups and large multinational corporations including Cavium Networks, Inc. where he was part of the technical sales and marketing organization responsible for the commercialization of the industry's first 10Gbps in-line security processor. Ketan holds a BS, magna cum laude, in Electrical Engineering from North Carolina State University, an MS, cum laude, in Electrical Engineering from the University of Illinois, Urbana-Champaign, and an MBA from the Tuck School of Business at Dartmouth. His current investments include: GainSpan, Intelleflex, and TimeSight Systems.
Ketan Patel, Principal, New Venture Partners
From which industry sector do you think we will see the most innovation in the next 2 years?
Mobile security. The existing security paradigm is arguably broken, as evidenced by the multitude of high profile attacks on seemingly secure enterprise and government institutions, and does not scale well for mobile devices. Consequently, innovations that result in new security paradigms that leverage the unique attributes (such as location awareness) of a mobile device while addressing the scalability challenges of the mobile environment will be interesting. There are at least two key rules that apply to security: 1) Hackers go where the people are…they look for scale, and 2) Hackers go where the money is. The growth of smart-phones, the introduction of various mobile payment systems, and the latent value of personal information that people store on their cell phones leads me to believe that mobile security is going to get a lot of attention in the next two years.
2011 is the year of ....
Acquisitions. As the economy recovers, we have seen our large corporate partners that have been building up cash reserves increasingly looking to deploy that cash to buy companies and technologies that present them with growth opportunities; presenting startups with interesting exit opportunities.
The biggest threat to the US venture capital industry is ...
Depressed returns in the asset class.
What is your favorite book of the last year?
Against The Gods: The Remarkable Story of Risk by Peter L. Bernstein. The book is a deceptively easy read that outlines the evolution of human risk perception and resultant human behavior.
Name a venture-backed company you are not invested in but wish you were.
Zynga. They drove a business model innovation (vs. a technical innovation) in the gaming industry that has upended the classical model of game/content creation, game delivery, and monetization.
Name a practicing VC from another firm who you admire and why?
Larry Finch at Sigma. His endurance in the Venture Capital industry is simply amazing. He has had tremendous success over three decades in Venture Capital, yet retains a tremendous excitement and passion for building great companies and helping entrepreneurs. Larry’s energy towards Venture Capital is truly inspiring.