Today the National Venture Capital Association released its long-awaited answer towhat ails the venture capital industry. In a four pillar plan presented here:
the association hopes to jumpstart a recovery in the IPO market, which has been dismal and shows no consistent signs of recovery. They are also promoting alternative forms of liquidity such as Second Market. Notwithstanding all of the thoughtful commentary and analysis, I couldn't help focusing on the wrenching simplicity of slide #7. It shows that the median age of a venture company that exits via M&A has grown from 3 to 6.5 years and the average age at IPO exit has increased from 4.5 years to 9.6.
This to me is the crux of the problem. The fact is, you cannot insert 3-5 years into the venture cycle and hold the other variables constant (e.g., average exit value) without breaking the model. On a risk adjusted basis, the IRR's simply won't stack up against the relative returns of other asset classes.
At the possibility of alienating my VC colleagues, I can't help wondering whether it's our partnership structure that needs to change rather than trying to return the regulatory environment, tax code and financial services industry all to their prior states. We can argue that those were the good old days, and for us they certainly were exceptionally good. But there were tons of abuses in the system that investors and the public at large got fed up with: directed share programs, pump and dump by the i-banks, the list is long and undistinguished.
Instead of going back to the past, it's worth asking whether we shouldn't reconsider our current model. We've been using the same general partnership structure since the 1960's and I think it's time to ask whether it still makes sense. When you consider that it takes 9.6 years to build a company that is even eligible to exit via IPO, a 10 year locked-in partnership with a 4-year investment period, backended partner compensation that is subject to clawback, steadily reducing fees, and in certain cases joint and several liability, it's no surprise so many smart people went to hedge funds.
But what if you're like me and truly love early stage venture? Some recent conversations I've had with a few very savvy investors suggest another path. In the past 2 months, I've spoken with several venture investors who are simply going to a deal by deal model and forgoing the structure of a formal fund. Using well-established networks of co-investors, they are pulling syndicates together for individual investment opportunities, generating fees (portions of which are re-invested in the deal) and earning carried interest on the success of each investment. It's a hybrid private equity/merchant banking model applied to early stage. For some very capable people, it's a more viable alternative than recreating an ecosystem that time, regulation and technology have altered permanently. I'm interested in what this smart community thinks is the right answer.
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