What’s New in the World of VC

Jonathan AbermanManaging Director

Amplifier Ventures

Jonathan Aberman• Founder of Amplifier Ventures –

seed venture capital fund.• Adjunct Professor, Smith School

of Business, University of Maryland.

• Advisor to government and universities on technology creation processes and policies.

• Former hedge fund trader and venture capital attorney.

• Founder of Accerta Group – consultants to family owned businesses.

Where Is All the Venture Capital?

• Venture Capital fundraising at mid-1990s levels.

• Angel investors abandoning seed and early stage financing.

• Fundraising concentrating in “existing teams” and into historically large funds.

• Large VC Funds making un-VC investments.

Meanwhile Capital Goes Elsewhere

• Hedge Funds -- $2.1 Trillion under management.

• Private equity -- $269 Billion raised in 2009.

• Venture capital -- $13 Billion raised in 2009.

Why Is This Happening?

The Investor Perspective– Returns are better in

hedge funds.– Private equity more

“predictable” than venture.

– Venture Capital suffers from “the Internet Bubble.”

The Fund Manager Perspective

• Managers make much, much more running hedge funds.– $25 Billion paid to top 25

managers of hedge funds in 2009.

• Fee income from private equity is large.

• Venture Capital is a long and difficult road.

The Market Is Acting Rationally

• Institutional investors chase predictable returns – they have to.

• Venture Capital and Angel capital are merely “asset classes.”

• Larger VC funds need predictable, shorter term investments to compete.

• Smaller VC funds and Angels are better suited to pursue long term returns.

Why Are Venture Returns Lower?

• Well, the economy hasn’t been terrific….

• But the larger reason may be found in the relationship between the creation of new technologies and commercialization.

New Technology IndustryNew

Company

New Company

New Company

New Company

Venture Capital Returns and New Investments

The Relationship of Government R&D to Venture

Capital

Venture Capital

Government Funded

R&D

New Technology Industry

As Technology Industries Mature Profits Decline

0 10 20

Time (years)

Launch

Exploitation

Commoditization

Returns from a Sustained Competitive Advantage

The End of Venture?

• Returns are depressed because certain technology industries are “maturing.”

• Venture Capital doesn’t create new industries; it finances their growth.

But Here’s Some Good News

• What we have seen through many cycles is that capital will flow to Venture Capital when the returns are there.

• We have a long history of new technology industry creation in the US.

• If we wait long enough, the current downward cycle in Venture Capital will likely “correct” as new industries emerge.

What Does this Mean for Starting Companies Now?

• Bootstrap, bootstrap, bootstrap.

• Utilize government grants and programs to promote technology company creation with emerging technologies.

• Understand industry your start up is going to operate in – if its in a “mature” industry – favor business plans that get to customers quickly.

• Adjust to the reality of the world.