Global Themes

On Globalization & Venture Capital

European VC beats European BuyOuts!

Simon Cook (Esprit) forwarded a couple of interesting insights from the latest EVCA report on European VC and BuyOut returns:

  1. “(on a)…5 year rolling IRRs, Euro Buyout +6.1%, US Buyout +5.4%, Euro VC -3%,US venture -6.7%”…so European VC performance appears better than US although still negative (presumably because of the J curve effect)
  2. “…with a net IRR of 36.5% the venture funds returned BETTER results than the buyout funds at 31.7% on this one-year horizon”…wow! 

I know, I know there is a lot you can quibble about but there is at least some cause to cheer…!

Nic has written a more thoughtful post about this here.

January 24th, 2007 Posted by | Venture Capital in Europe | no comments

Of “talking tins” and “intelligent clothes”…

logo5.jpg

Plastic Logic, one of our portfolio companies became the media darling of Europe on the back of its $100m financing round that concluded a few weeks back.

My personal favourite was this headline, “Could a tin talk you into having beans for tea?”

I love PlasticLogic because it represents the archetype of a disruptive technology with enormous potential…another one in our portfolio is PowerPaper …and yet one more is Solexa …(I can go on and on !)

Curiously, Polymer Vision announced their own funding round just a day after PlasticLogic…too much of a coincidence?

January 16th, 2007 Posted by | Venture Capital in Europe | no comments

What ails European Venture? – II

Last month, I posted some data from Cambridge Associates which showed European Venture Capital to be one of the worst performing amongst the asset classes they look at.

A few days ago, I heard about Simon Cook’s slides that showed European Ventures were doing at least as well as their US counterparts (exception: Google). I finally managed to have a look at them on the flight to New Delhi yesterday.

Simon has showed a strong set of data and no wonder it has caught the attention of a lot of people looking at European Venture (see e.g. $1bn entry on Fred Destin’s Blog and alarm clock). I particularly liked the last five slides…worth a dekko.

I later sent an email to Simon asking, “Why can’t LPs see the returns yet?”

In his response, Simon gave at least four reasons for why cash returns from European ventures are still elusive:

1. the fragmented nature of stock markets in Europe (particularly for growth stocks; I take it he was referring to AIM, Nuer Markt etc.) and lock-up/ lock-in periods.
2. the (still) small number of VCs (barely 20) who have consistently delivered $100m+ exits (I am happy to say that both Esprit and Amadeus are in this small group)
3. the nascent stage of the market and lack of a comparable run-up to what was witnessed in US leading to 2001
4. lack of enough data (apparently CA’s data on European Ventures is based on less than half a dozen data points) and European conservatism/prudence (re. valuation)

These are valid points and I believe at least part of the reason why European venture is not perceived as a success is because it is not talked about as such (by the practitioners themeselves)…

Simon’s slides go some way in correcting that perception.

December 6th, 2006 Posted by | Venture Capital in Europe | one comment

5 VCs at Nobu…& not 1 deal done (shame)

Thanks to Jason’s initiative and persistence, we did manage to pull it off…

Getting more than 2 VCs in a one place at the same time is difficult in the best of times…

So getting 6 of us (Jason, Fred, Nic, Paul, Max + me) to agree to come together at one place- almost at the same time…especially when all of us are so incredibly busy (writing blogs, mostly!)…was a heroic feat. Thanks Jason!

Fred wrote a nice post about the evening…and also put a photo of the bar (looks even nicer when inside!)..

We talked about some of the common pains of blogging:
1. (risk of) marital discord…No, I just made it up…
More seriously, (i) creating “rich” posts and (ii) user friendly tools…Jason is going to check out Flock’s 1.0…I will eagerly await his review.

Most importantly, as Fred wrote, “There are not enough entrepreneurs and VC’s participating in this to create really sustained conversations“…

I share that sentiment…and have some ideas around improving the situation…

Watch this space…

November 26th, 2006 Posted by | Miscellaneous, Venture Capital in Europe | 6 comments

What ails European Venture?

At the TechVenture Asia conference, I picked up these depressing statistics:

The data comes from Cambridge Associates who have also included their data from 2004 to get a sense of perspective:

From Cambridge Associates’ 2004 report: “In aggregate, the historical performance of private equity partnerships in Asia has been disappointing…Asia remains a region of greater potential than of actual opportunities for private equity investors, but that potential is gradually becoming more tangible, less will-o’-the-wisp and merits close attention in light of the regions dynamic growth prospects…”

Mean End-to-End Performance as of 31 March 2004*

One Year

Three Years

Five Years

Ten Years

U S Venture Capital

3.03%

-19.62%

46.36%

38.57%

U S Private Equity

27.91%

3.86%

5.04%

11.06%

European Venture Capital

-4.44%

-19.59%

-3.51%

6.00%

European Private Equity

27.98%

16.68%

14.62%

16.25%

Asian Venture Capital & Private Equity combined

22.96%

-0.14%

1.38%

0.49%

Things have obviously come a long way since then for Asia…here are the updated performance figures for 2006:

Mean End-to-End Performance as of 31 March 2006*

One Year

Three Years

Five Yrs

Ten Years

U S Venture Capital

13.8%

9.9%

-6.5%

39.5%

U S Private Equity

31.8%

27.3%

12.2%

13.4%

European Venture Capital

1.9%

-1.0%

-9.0%

0.8%

European Private Equity

31.5

30.2%

22.3%

20.9%

Asian Venture Capital & Private Equity combined

24.4

20.8

7.0%

4.7%

* Pooled end-to-end mean return net of fees, expenses and carried interest as calculated by Cambridge Associates

Whats dragging European venture down?

November 2nd, 2006 Posted by | Emerging Markets, Europe and Asia, Venture Capital, Venture Capital in Europe, Venture Capital in US | no comments

Beginning of The End for Venture Capital?

Since the summer of last year, I have been hearing news that something is not quiet right with Venture Capital – at least in the US context.

First you had Promod Haque at TiEcon 2005 saying that, “”Over the next five to ten years, I believe there are going to be half as many venture capital firms in this business, and there are going to be half as many companies being created”…his opinion on returns was even more pessimistic, “Over the next ten years, you’re going to get 30-year bond yields on venture capital investments”.

John Malloy of BlueRun Ventures, speaking at the same conference suggested that the main problem was not so much as oversupply of capital as concentration of it in Silicon Valley (or more broadly US)

But neither Promod nor John talked about getting out of Venture Capital.

However, Howard Anderson, Founder of Battery Ventures (and now the William Porter Distinguished Lecturer at MIT’s Sloan School of Management), actually penned an article in the Technology Review titled, “Good-Bye to Venture Capital

Howard’s main contention (and the title of the piece he wrote) was: “Technology finance has turned rational — so I’m outta here”. In the article, he said: “…We venture capitalists like to think of ourselves as giants striding across the technology landscape, showering money on terrific young entrepreneurs, adding value, creating jobs, nurturing real companies. We are financial samurai.”

“But I am giving it up. Why?
First, technology supply is bloated. Innovation is not dead, but demand for new technologies is moribund and will continue to be weak for at least the next five years…
Second, there’s a good reason why technology spending is stagnant. The hype machine is broken… 
Third, the financial markets for technology companies are no longer exuberantly irrational…We need a little irrationality to earn a living — but the total capitalization for the leading technology companies is now one-sixth of what it was five years ago.
Fourth, these changes in venture funding are structural, not cyclical. VCs actually like cyclical markets; we can buy in cheaply and wait for exuberance to bail us out. …But those days are, regrettably, over.”

And he fondly remembers the good old days of Venture Capital:

“Ever wonder what we did for a living in early-stage venture funding? I bet you think we spent the day searching for the next insanely great company. But we spent most of our lives in endless meetings with people who were lying to us: scientists who swore that their patents were solid and entrepreneurs who insisted that they had no competition. We lied right back at them: said our money was different.

That was the old way, and it was tons of fun, and we all made too much money. I’ll miss it. But now the markets are too rational, and the returns are too small and uncertain. So, time to leave.”
Last week’s big news was of course Sevin Rosen. Steve Dow, one of the Partners was quoted in the New York Times as saying, “The traditional venture model seems to us to be broken” Sevin Rosen is no ordinary firm…Over its 25-year-old history, it has backed some of the best tech start-ups in the US and was raising money for its 10th (!) fund.

Sevin Rosen offered three main reasons behind this radical step:
• Too much capital
• Too many companies being financed and
• A weak exit environment

It also said that “The venture environment has changed so that overall returns for the entire industry are way too low and even the upper-quartile returns have dropped to insufficient levels.”

Had these words been uttered by anyone else, they would have been dismissed off as “excuses” for a difficult fund-raising or poor performance. In case of Sevin Rosen, neiither of this is true.

Although there have been instances of firms returning money to investors – most notably after the 2001 dotcom burst, I had not yet heard of an entire fund being being called off – especially when there is no trouble raising it…
What is going on? Is this the beginning of the end? Depends on who you ask and where you are talking.

At the EVCA last week, I sensed an unmistakeable mood of optimism…it even looks as if it might be the end of the nuclear winter for European VCs

Are things different in the US? Kliener Perkins, Hummer Winblad and others don’t think so..In fact, Mitchell Kertzman at Hummer Winblad thinks this is “one of the best times to be an early-stage investor”.

My feeling is that more than returning the fund, what Sevin Rosen really did was to buy time to think…think whether there is a new model that may work better, think whether there are new geographies that could be explored (Sevin Rosen is conspicuous by its absence in China or India), whether they need to move at the earlier stages of the venture cycle, work with affiliates, invest less in a larger number of companies or something entirely different.

I think most of us in this business (whether in the US/ Europe) would agree with Fred Wilson that the model that worked for the last 30 years will not work for the next 30..

So what needs to be done differently?

One thing is clear – firms, investee companies and investors themselves (VCs as well as LPS) need to think about their strategy for other parts of the world, Europe in case of US LPs and firms, Asia in case of everyone in Europe and US. Fred refers to it in his list of trends: “- the globalization of technology development and consumption

Josh Jaffe also talked about Sevin Rosen’s decision in his post, “Sevin Rosen’s capitulation is not indicative of VC industry problems”

He summarises the situation neatly in his last paragraph: “Despite Sevin Rosen’s claims, there are few lessons from this fundraising failure that should be applied to the entire venture capital industry. This is about one firm’s inability to succeed without its founders. It’s about a firm’s unwillingness to believe in new technology movements such as the Internet. What it’s not about is the venture capital model being broken….”

I believe him…but I also think that the bar has just been raised a few notches higher.

October 16th, 2006 Posted by | Venture Capital, Venture Capital in Europe, Venture Capital in US, What VCs really do | 2 comments

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