flf final 26mar10 full version no video

1 Flybridge Capital Partners 2010

the king is dead, long live the king the once and future state of venture capital

david aronoff general partner

flybridge capital partners [email protected]


agenda

•  the VC model needs an upgrade •  clues from history •  implications for entrepreneurs •  semi-random thoughts


some facts

•  1972 to 2007, ~2500 VC-backed IPOs in US –  13% of all public firms at end of 2008. –  8% of market capitalization ($2.0 trillion) –  6% of total employees.

•  Particularly true in high-technology industries.

•  VC appears ~3 to 4x more powerful than corp R&D –  From late 70s to mid-90s, VC was only 3% of corporate

R&D, but responsible for ~10%-12% of privately funded innovations.

source: Lerner


•  basic premise: an overabundance of great ideas + an undersupply of capital = only “best” ideas get funded

•  a sector supports 4-5 players –  1 is a home run –  2-3 are “ok” outcomes –  1-2 holes in the ground

•  “healthy” industry loss ratios

•  LPs can afford to remain patient

the way it was


the way it is

•  situation: an overabundance of similar ideas + an oversupply of capital = nearly every good idea got funded

•  sectors have 10+ combatants –  0-1 is a triple. 0-3 are “ok” –  6-10 holes in the ground

•  vc loss ratios go through the roof

•  LP patience waning b/c returns suffer & great recession impact

© Robert Mankoff, New Yorker with thanks to Prof Bill Sahlman, HBS


the dream exposed


time for an upgrade

US Venture Capital Returns: Inception to 3/31/08

Source: Venture Economics, Prof. Paul Gompers HBS n=1927

8 Flybridge Capital Partners 2010 Source: NVCA

Includes: General Partners, Managing General Partners, Venture Partners

$55

$105

$39

$9 $12 $19

$29 $32 $36 $28

$6

451

653

321

206 163

211 239 241 251 221

70

0

100

200

300

400

500

600

700

$-

$20

$40

$60

$80

$100

$120

VC F

unds

Clo

sed

$B U

SD R

aise

d

US VC Fund Raising and Funds Closed

Dollars Firms

Fewer Professionals Investing Less Capital Being Committed

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

10,000

1980 1987 1988 1997 1998 2007 2008 2009E

Venture Professionals

product refresh underway


Free Fall 2000-2002

1983-85 1969-71

Bottoming 2003-08 1986-90 1971-74

Firming 2009-?

1991-96 1975-80

Accelerating 1997-99 1981-83 1967-69

PEAK

TROUGH

1999/00 1983 1969

2009 1990/91

1974

Source: Brooks Zug, Harbourvest Partners

10% 2%

26% 12%

Vintage Year IRR Top Quartile Median

we’ve seen this movie before

investing through the trough offers strong opportunities


so …

•  clearly VC has been very important driver of innovation and wealth creation

•  but: –  low returns for past decade –  tremendous randomness in exit markets –  far too many companies funded –  calculus of funds doesn’t solve –  embroiled in secular & cyclical trough

•  has become at best a short-tail phenomenon and at worst a random-walk.


what happens next

•  the number of VCs must shrink –  NVCA estimated 10% in 2009, 15% more in 2010 –  PCG predicts 1500 firms to 500 within 5 to 7 years

•  accordingly, amount of money and number of limited partner investors will decrease

•  this won’t happen overnight –  VC partnerships are 10-12 years in duration, and

they’ll drag out last fund in hope of hail maries

•  trickle down impact –  fewer numbers of startups will get funded –  smaller financings due to decreased VC fund sizes


set the wayback machine


that 70’s show

•  VC circa 1970’s –  take the good

•  small funds (in dollars & professionals) •  generalists wrt industry focus / versatile •  collegial approach / lots of syndication

–  size of funds & firms -> so smaller financings –  longer horizons until liquidity

–  ignore the irrelevant •  bootstrapped companies - no startups (mid/late 80’s phenom)

–  adapt the model to the current environment

•  Much of this is happening organically already


implications for entrepreneurs

•  focus on capital efficiency until inflection point –  garage: bootstrap model – over longer period, CFBE –  seed-like: quicker time to lift-off (or crash) on short $$ –  supersized first rounds: will be harder to come by

•  concentration on new areas w/huge potential SoM –  new media, energy-technology, revolutions –  fewer me-toos (salami model)

•  financing models morph –  angels /seed funds /VC get along because they have to –  full-funded staged approach?

what the new model means:


implications for entrepreneurs

•  venture investors won't invest in early-stage ideas –  it’s the charter of our fund and most others

•  investors only look for epic returns (10/100x) –  my crystal ball is really no good

•  VCs are replacing angel investors –  but we’re actively making seed investments

•  bellbottoms are back in style –  did they ever really go out?

what the new model doesn’t mean:


semi-random thoughts #1

•  VC performance is highly persistent –  good continue to do well, but so do poor performers!

•  this is true for entrepreneurs and investors

•  deal sourcing is key factor –  successful entrepreneurs have returns that are 50%

greater than first timers or those who failed last time •  success more likely for first timers than those who failed last time

–  50% of the outperformance of top fund is due to higher concentration of serial entrepreneurs

•  VC value-added is greatest with first timers

source: Gompers, Lerner, Sahlman



•  funding/opportunity size ratio –  not all big opportunities require big financings, at least

at first, sometimes at all –  but some types of investments require huge rounds

early on; don’t know if they’re good bets, just know I won’t place them

•  being first matters a lot –  the tao of glen garry glen ross

•  mike maples’ “thunder lizards” •  “gap” vs “gretzky”



•  home-run mentality –  Are VCs bound to the home-run model or should they be more

focused on OBP? –  I suggest that both the home-run and OBP models don’t work,

but a hybrid of both is warranted (shameless self-promotion)


discussion

flf final 26mar10 full version no video

Economy & Finance