New Venture Capital Model Is Coming? Limited Partner Investors Seeking New Avenues January 7, 2009
Posted by John Furrier in Technology.Tags: entrepreneurship, silicon valley, startups, venture capital
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Is this financial market mess going to put the nail in the venture community? Today’s Venture capital has been struggling for sometime with ony a few small hits and very handful of big returns. The problem is that entrepreneurship is stuck because of venture capital. We need to modernize the venture capital business so entrepreneurs can get busy. I am seeing more early stage creative development then in years past. The entrepreneurial process will never die but it will evolve. These are the pains that we are seeing now with startups. The capital markets are a mess and with no liquidity market today’s venture capital firms are spinning their wheels. The good news is that capital markets are efficient and will work around the bottleneck we are seeing. This NYTimes story is an early indicator that big money will find new homes.
NYTimes has a very interesting story…
Investors in venture capital and private equity funds who want out are discovering that their stakes are worth less than they paid for them.
As returns on venture capital investments sour and investors’ wealth deteriorates, some of these investors — the universities, foundations and pension funds known as limited partners — have been unloading their stakes in the funds. When they decide they can no longer supply the money they had previously committed, they sell their stakes at a discount to what is known as a secondary firm.
In the second half of 2008, as more limited partners tried to sell their stakes, the price they could get for those stakes fell to 61 cents for every dollar of face value, according to a report from Cogent Partners, an investment bank for institutions looking to sell their holdings on the secondary market. That is down from 84.7 cents on the dollar in the first half of the year and a 4 percent premium in 2007.
A stake in an early stage venture capital fund that has already been fully invested, for example, would be worth 10 to 30 cents on the dollar, Mr. Gull said. “It would have relatively young portfolio companies, some number of them will need additional capital so the fund will get diluted and there are not going to be any exits for some number of years.
A 40 percent loss is no different than investments in the public markets, Mr. Gull noted, and investors would prefer to have the cash. They think, “It’s a sure thing that I can redeploy in some other activity I think has a larger chance for return,” he said.
Mr. Gull said he could not predict when pricing would improve, but his firm is betting that it will not see any meaningful returns from private equity and venture funds until late 2010.
Great post John. We need new “blood” in the VC industry so the entrepreneurs get to do what they love most – start up and launch great products and services. I think angel investors can be more proactive in this time when big VCs and their LPs are withdrawing from the ecosystem. And their returns could be higher as startup costs have come down over time.
Hey John – so I agree with both the article you link and your first commenter, iPhoneDevGuy, and I would like to add that I think a key thing for both entrepreneurs and investors is to think long term – 2010-2011-2012 – and whatever company you start or invest in, make sure it can last till at least 2012, and that the team is committed to sticking around till the economy permits exits again.
I agree, the model needs to be tinkered with a bit. If you’re in Southern California, you may want to mark your calendars for February 23. Adeo Ressi and VC’s are having a summit at Chapman University to uncover solutions on how to get capital into the hands of entrepreneurs.
More info here: http://innovation2009.eventbrite.com
[...] Comparing Silicon Valley to Detroit is ridiculous, but Dan Lyons does bring up a big issue worth discussing – innovation problem. Silicon Valley is not setup for long term research in a way that made it what it is today. We are seeing institutional research vaporize in front of our eyes. Checking around it’s apparent that there is very little core and applied research going on. If there is research it is controlled by short term horizons like business profits and venture capital horizons. I’ve said before that we need a new approach. [...]
[...] My angle is that Silicon Valley is not setup for long term research in a way that made it what it is today. We are seeing institutional research vaporize in front of our eyes. Checking around it’s apparent that there is very little core and applied research going on. If there is research it is controlled by short term horizons like business profits and venture capital horizons. I’ve said before that we need a new approach. [...]