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Inside the $250 Billion Venture Capital Industry

Posted on Thursday, Sep 7th 2006

WSJ reports that Mobius Capital, an erstwhile star venture firm in Silicon Valley, is folding. Worldview is also falling apart, abandoning its latest efforts to raise a new $250 Million fund. These are the larger departures. Many smaller funds that had cropped up during the boom era, have folded by the dozens.

Nonetheless, the flow of capital continues unbridled in Silicon Valley. In July, New Enterprise Associates (NEA) announced a $2.5 billion 12th venture fund, which will focus on information technology and health-care companies. A portion of the new fund, one of the largest venture funds ever, will be used to invest in India and China.

The Venture Capital Money Cycle

Serious capital is chasing India, China, BioTech and CleanTech. Each has its own issues. I recently wrote a series of articles on the Indian Venture Capital situation, lack of expertise in seed investing causing a bottleneck in the pipeline (Venture Capital in India, Too Much Money, Too Few Deals).

China is in a similar excess capital situation, although the trends are somewhat different in the investment mix. Over $750 Million was invested during the first half of this year in 85 deals. But the majority of venture capital continued to go to established companies, with half of the companies receiving financing in the second quarter were already shipping products and 15 had attained profitability. However, first-round deals accounted for 54% of the quarter’s total number, and 38% of the total capital, with the average size of a first-round deal being $4.3 million.

This indicates, that entrepreneurs in China too are bootstrapping the seed stage. This will continue to be a bottleneck in the Chinese dealflow.

BioTech & CleanTech are receiving huge attention in the US market, although in India and China, the focus is still largely on IT.

Capital investment in health care companies increased 25% over the same quarter a year ago, reaching $2.24 billion in 160 rounds. The biopharmaceutical segment was the major driver of this with 80 deals and $1.45 billion invested, including eight of the top 12 deals posted this quarter. Of note, a number of those large deals included partnering investments from major pharmaceutical companies. The total investment in biopharmaceuticals was the most capital investment in the segment since VentureOne began tracking the data in 1992.

The medical devices segment also had a strong quarter with 58 deals and $617.6 million, increases of 32% and 30% respectively, over the same quarter last year. While the health care category was responsible for a number of the largest deals, investors also funded 58 seed and first-round health care deals this quarter, up from 47 in the same quarter of last year. The median size of a health care deal was $8 million, down slightly from $8.2 million a year ago.

BioTech is a long gestation period business. New drugs often take 12 years to get to market. Typically, patience has not been the forte of Venture Capitalists, but looks like they are biting the bullet and signing up for the long haul.

Reneweable Energy, CleanTech, and other Green issues have recently been riding the hypecycle. Also very long gestation period deals. We’ll see how long the VCs, who boast acute attention deficit disorder, last in these categories.

The growing interest in renewable sources of energy fueled increases in the alternative energy segment which had deal flow triple from a year ago to 15 and investments reach $239.1 million, a 290% increase. The energy category as a whole reached its highest level on record with $354.4 million invested in 25 deals. Of note, two of the largest deals this quarter were alternative energy investments: a $75 million later round for Nanosolar of Palo Alto, Calif., and a $50 million first round for Altra of Los Angeles, Calif.

For more detailed statistics, please see the EY-Venture One coverage.

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Nice write-up. Good detail on a number of topics.

My longish post on the Mobius topic here:

Mobius Venture Capital Getting Hammered in the News
https://www.brianberliner.com/2006/09/08/mobius-venture-capital-getting-hammered-in-the-news/

I have no idea why the firm is not raising another round.

My article perhaps wrongly assumed that it was because they were under-performing.

Perhaps it was because the GPs didn’t like working with each other?
Perhaps it was because Gary left?
Perhaps it was all of the above?

No matter. We will never know.

Brian Berliner Friday, September 8, 2006 at 4:36 AM PT

Brian,

There is a larger phenomenon at work in Silicon Valley right now. I wrote about it in an earlier piece: Silicon Valley Leadership – The Quest for a Legacy. While this article was written from the pov of CEOs and Executives, it also applies to Entrepreneurs and VCs.

A lot of people are facing existential questions about meaning of life and so forth. Many have lived jet-setting lives for years, hopping on planes ten times a month, spending very little time with friends or family. These people are facing burn-outs, reluctant to enter into another position that requires a similar lifestyle.

Also, being a VC is a lonely profession, with a very long path to return and satisfaction. The value add is indirect, entrepreneurs generally reaping the fulfillment of the day-to-day victories that make the journey rewarding. By the same token, it is the entrepreneurs who toil through the troughs as well, with VCs maintaining arms length positions, hence never suffering as much either.

On the other hand, VCs make a shitload of money 🙂 Very few professions have a compensation structure as high for doing as little. The lifestyle, generally, is full of perks. It takes a lot of insight and maturity to be able to pass on this profession for those who live in its midst, and have the qualifications to get a job as a VC.
Try raising money in July, August, or December. VCs aren’t around. There’s a joke: Why is it difficult to schedule a meeting with a VC on a Wednesday? Ans: Because it screws up two weekends. (Just a joke, mind you! I know VCs who work very hard.)

Anyway, there are some very good VCs. It is a necessary profession for the health of our industry, and has created a lot of value by helping build important new eco-systems. But, as is evident from the article above, there are way too many in the profession, and certainly not enough good entrepreneurs / executives to absorb that kind of investment. Hence, a lot of VCs are going through hell these days. For every John Doerr, Vinod Khosla & Mike Moritz, there are hundreds of VCs who struggle to find deals to invest in, and when they do invest, to shepherd successful exits. Few have enough vision, reach and guts to go build new industries that can spawn hundreds and thousands of new businesses.

Also broken, in my opinion, is the partnership structure of venture firms. Without any direct management and accountability structure, artificial power groups form within the firms. Pecking orders become super important. Compensations are quite different between junior partners and senior partners, with some exceptions like at Benchmark. When things are not going well in these partnerships, they tend to fall apart, not having the team spirit to struggle through difficult times.

Sramana

Sramana Mitra Friday, September 8, 2006 at 7:35 PM PT

[…] Sramana Mitra on Strategy » Inside the $250 Billion Venture Capital Industry Nice writeup on the VC industry in India (tags: blog india venture_capital) […]

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