Simon’s Blog

There is a great post by Peter Rip on the current state of Venture Capital. Speaking as an entrepreneur, I have a couple of observations.

Firstly, I don’t see a lot of appetite amongst VC individuals to create billion dollar companies and massive returns. Why? I guess in part, it’s because they’re risk-averse. Many individual VCs seem to be at their happiest doing low-risk deals that can probably generate solid 3X returns. I guess that’s because of the mismatch between personal wealth and corporate wealth. The VCs are happy making a few million from their percentages of the carries on their funds; even if this doesn’t translate into big returns for the VC group’s own institutional investors.

Secondly, I suspect that the profiles of what VCs want to invest in may be the “wrong shape” to take advantage of what today’s “typical” billion-dollar opportunities look like. The conventional wisdom is that with a fund of up to $500M, you can invest in early-stage companies; any larger than that, and you just can’t put enough capital to work. Why is that? It’s because the VCs know they can deal with only so-many portfolio companies. So, with a $500M fund, for example, a VC would be looking to invest between $20M and $40M in a company over the lifetime of the investment (up to five years). The problem with that approach is that it assumes there is a large number of opportunities out there that will provide good venture rates of return, based on those criteria. It may be that there aren’t - at least, not at the moment.

The interesting thing is, I genuinely don’t see any shortage of opportunities to create billion-dollar companies, and massive returns. But, many of these simply don’t match the profile of what most VCs would currently want to invest in. So, with today’s markets, one valid approach for VCs is to focus on small, early stage investments. The consequence of that is that they can have only small funds (say $100M). I think the challenge for VCs in VC groups with $500M funds is to think hard about what it takes to create a billion-dollar company in today’s markets; and then make the necessary changes in their organisations, so that they can invest in these opportunities.