VC and Angel Ebbs and Flows in the Tech Sector

December 3, 2012 at 2:21 pm 1 comment

Much has been written of the Kauffman Foundation report, “WE HAVE MET THE ENEMY…AND HE IS US” from May, 2012 about the abysmal returns from venture funds, particularly larger ones, since the late 90’s.

Some of Kauffman’s findings from their experience with 100 VC funds over 20 years are frightening to those of us rooting for a healthy VC industry:

• “VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in VC.”

• “Only twenty of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995.”

• “Only four of thirty venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index.”

• “The average VC fund fails to return investor capital after fees.”

So it is not surprising to see that in 2012 VCs are raising less capital ($16B so far) than they are investing ($20B so far, or about $6.5B per quarter) according to PricewaterhouseCoopers. One would rightfully conclude that given the poor performance of traditional VCs over the last 10-15 years, their current activity reflects the appropriate consolidation and restructuring of that business.

In and of itself this dynamic is the epitome of a shrinking market and would seem potentially damaging to the long term prospects for the tech sector.

Angels and Corporate VCs trend up

But juxtaposed to the contraction institutional investors are undergoing is the continuing strong activity among other sources of venture capital: angels and corporate VCs. An SVB study, The Halo Report earlier this year showed that angel investors pumped almost $500M into start-ups in 1H 2012.

Similarly a CB Insights report on the Corporate Investor segment reported that Corporate sponsored venture funds invested $2.1B in Q2 2012 and invested in 15% of all VC deals. Equally important to entrepreneurs is that angels and corporate VCs are showing an ever increasing appetite for seed investments.

So it would appear that angels and Corporate VCs are riding to the rescue of today’s swelling tech entrepreneur class, and that is certainly welcome news. And it makes sense empirically as anyone who has recently visited or done business in San Francisco can attest. Entrepreneurship is everywhere as a slew of start-up office clusters and incubators have attracted countless start-up teams often funded by angels or friends and family. The energy and activity resident there is palpable and shows none of the challenging realities facing the average institutional VC fund.

So perhaps the message for today’s tech entrepreneurs seeking funding is best described by that old adage…something about whenever a door closes somewhere a window opens.

J. Weston (Wes) Rose is Senior Vice president of The Brenner Group, one of Silicon Valley’s premier professional services firms. Wes has enjoyed an extensive career as a C-level operating executive with multiple venture capital backed technology companies and now runs the firm’s interim management and restructuring practices.


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Entry filed under: Financial Advisory, Interim Management, Restructurings, Shareholder Services.

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1 Comment Add your own

  • 1. Peter Hewitt  |  December 3, 2012 at 2:43 pm

    Nice report Wes. You’re right on to highlight the emergence of incubators/accelerators with smaller cash infusions for startups to build first gen SaaS/web products and services. Entrepreneurs need to take smaller, early stage money and prove out models before reaching out to traditional VCs who now look to later stage/larger rounds.

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