What Key Factors Should Risk Officers Consider When Using Generative AI
Flf final 26mar10 full version no video
1. the king is dead, long live the king
the once and future state of venture capital
david aronoff
general partner
flybridge capital partners
david@flybridge.com
1 Flybridge Capital Partners 2010
2. agenda
• the VC model needs an upgrade
• clues from history
• implications for entrepreneurs
• semi-random thoughts
2 Flybridge Capital Partners 2010
3. 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
3 Flybridge Capital Partners 2010
4. the way it was
• 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
4 Flybridge Capital Partners 2010
7. time for an upgrade
US Venture Capital Returns: Inception to 3/31/08
Source: Venture Economics, Prof. Paul Gompers HBS n=1927
7 Flybridge Capital Partners 2010
9. we’ve seen this movie before
PEAK
Accelerating 1999/00
1983
Free Fall
1997-99 1969 2000-2002
1981-83 1983-85
1967-69 1969-71
Vintage Year IRR
Top Quartile
10%
Median 2%
26%
12%
Firming Bottoming
2009-? 2003-08
2009
1991-96 1990/91 1986-90
1975-80 1974 1971-74
TROUGH
investing through the trough offers strong opportunities
Source: Brooks Zug, Harbourvest Partners
9 Flybridge Capital Partners 2010
10. 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.
10 Flybridge Capital Partners 2010
11. 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
11 Flybridge Capital Partners 2010
13. 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
13 Flybridge Capital Partners 2010
14. implications for entrepreneurs
what the new model means:
• 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?
14 Flybridge Capital Partners 2010
15. implications for entrepreneurs
what the new model doesn’t mean:
• 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?
15 Flybridge Capital Partners 2010
16. 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
16 Flybridge Capital Partners 2010
17. semi-random thoughts #2
• 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”
17 Flybridge Capital Partners 2010
18. semi-random thoughts #3
• 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)
18 Flybridge Capital Partners 2010