Back to the Future for Venture Capital

In 1958, worried that America was trailing the Russians in the great technology race, President Dwight Eisenhower signed into law a bill he believed would kick-start American innovation and put the U.S. back in the lead. The Small Business Investment Companies Act not only created a unique public-private partnership that reignited the country’s passion for innovation, it also spawned the modern venture capital industry, which would go on to bankroll entrepreneurs’ ability to turn their dreams into reality. Some of the most important U.S. corporate success stories — from tech titans Apple and Intel Corp. and biotech pioneers Amgen and Genentech to more recent e-commerce leaders Amazon.com and eBay and social media darlings Facebook and Twitter — were initially backed by venture capital.

But now, a half-century later, the venture capital industry is struggling. Profits are virtually nonexistent, and for the first time in VC’s history, the ten-year rolling returns will be negative. The innovation that fueled venture capital’s early achievements is being put to the test as industry stalwarts fight to ward off the business’s total collapse.

Venture capital, like other alternative investments such as private equity and hedge funds, is a victim of its own success. Thanks to early outsize returns and aggressive marketing, venture capitalists were deluged by money from endowments, pension plans and other institutions beginning in the mid-1990s, often through funds of funds that promised access to the most successful and exclusive VC firms.

“We went from being a unique cottage industry to a burgeoning asset class,” notes Yatin Mundkur, a managing partner of Artiman Ventures, a Silicon Valley venture capital firm that manages about $360 million in assets.

The VC industry’s strength was its ability to take small sums of money and create large, sustainable businesses through innovation. But the processes that work for dozens of companies cannot be scaled to thousands of companies, especially when they are all in the same sector. Bigger, it turns out, is not better.

在机构投资者大规模配置的重压下，风投行业迷失了方向。受上世纪90年代互联网泡沫和股市繁荣的亚博赞助欧冠炒作提振，风险资本家将资金以峰值注入初创企业，相信它们能够通过首次公开发行（ipo）或企业收购退出。几年来，他们是对的。但随后泡沫破裂，股市崩盘，只复苏了短短几年，在大萧条中遭受了更严重的打击。退出策略消失了，使得风险投资基金背负着大量消耗现金的成熟公司，回报率几乎为零。

不足为奇的是,新钱干up. Capital committed to venture funds in 2009 was $15.2 billion, less than half of the $28.6 billion committed to them in 2008 and about one seventh of the $105.3 billion VC funds received in 2000, according to the National Venture Capital Association.

总部位于纽约的私募股权公司assets Cornerstone Equity Partners拥有12亿美元资产的执行合伙人、波士顿大学董事会主席罗伯特•诺克斯（Robert Knox）指出：“作为受托人，在现有资产大部分处于水下的情况下，很难证明增加风险资本资产是合理的。”。诺克斯在1981年帮助保诚保险公司（Prudential Insurance Co.）创立了风险投资计划，成为顶级风险投资基金的最大投资者之一未来几年，主要捐赠基金和机构对待风险基金的方式将发生永久性的变化。”。

Today the VC industry is laboring to adapt to a violent contraction — the reduction in capital flow and the shuttering of funds — even as most venture capitalists agree that this downsizing is critical to ensuring its future. But recovery won’t come overnight. Mundkur says venture capital should never have grown beyond its cottage-industry roots, with funds of funds having transformed it into a run-of-the-mill money management business in which fees are earned irrespective of performance. “We have to return to the past to step into the future,” he asserts.

班次正在进行中。风险投资现已受到天使的影响 - 个人投资者的网络，他们通常在早期公司中投入多达150万美元。VC资金还覆盖其大小并针对新的投资领域，在那里他们可能几乎没有直接经验，但提供了更多的机会。他们正在寻找数量的力量，形成社区分享交易。

Venture capital has never been a stand-alone business. It has succeeded in the U.S. because it has had the benefit of an abundance of innovative technology, often backed by tens of millions of dollars in government funding; a group of specialized investment banks that invested in forward-looking companies and helped underwrite their public offerings; stock exchanges that promoted trading in young, often development-stage companies; and a market of investors and corporate buyers that allowed orderly exits for venture capitalists.

To ensure its future the industry needs to capitalize on its historical strengths while adjusting to a new world. There are signs suggesting it will do more than merely survive. The venture investment in September 2009 in Twitter was a bright light for an industry mired in dark times. The San Francisco short-messaging firm raised $100 million in its latest round of financing, giving it a valuation of $1 billion. Twitter has never confirmed that valuation, but it has twitter-thanked the investors in its new round — Benchmark Capital, Insight Venture Partners, Institutional Venture Partners, Morgan Stanley, Spark Capital and T. Rowe Price.

尽管有十年的良好性能和令人沮丧的回报，但一些风险公司继续筹集大量资金。新的企业伙伴在巴尔的摩和旧金山设有办事处，1月宣布，它在第13个基金的第一次结束时筹集了24亿美元。由前Kleiner Caufield＆Byers Partner Vinod Khosla创立的Khosla Ventures表示，它筹集了两项资金：7亿美元的游泳池投资清洁技术，较少的2.8亿美元用于初创企业。橡木投资合作伙伴称，该十年的最严重履行资金之一，于2006年获得了26亿美元，在2009年努力提高15亿美元。

哈佛商学院William Sahlman教授，他们拥有与风险投资家和企业家合作的经验，有一个简单的解释，为什么有些投资者继续投资：“风险投资就像第二次婚姻 - 过度经验的胜利。你怎么能解释为什么有限的合作伙伴继续使用平庸的曲目记录的公司？“

部分原因可能是由大型基金和捐赠基金组成的有限合伙人群体与品牌风险投资公司之间的友好关系。像HarbourVest Partners、瑞士信贷（Credit Suisse）和高盛（Goldman，Sachs&Co.）这样的基金巨头继续将大量资金分配给风险投资，几乎总是分配给大型基金。”他们已经把一个投资业务转变为一个经典的货币管理业务，在这个业务中，无论投资结果如何，收入都是由费用产生的。

风险投资基金获得年度管理费，通常约占资产的2％。因此，如果风险投资基金管理2亿美元，则可以在伙伴关系期间每年占用400万美元。如果基金制造现金分配 - 向投资者支付一些原始资本 - 调整费用以反映仍然管理的实际金额。此外，风险投资基金还收到了20％的百分之一率的利润百分比。如果200万美元的基金产生了1亿美元的利润，该基金将收到额外的2000万美元。批评者注意到，无论表现如何，管理数十亿美元的商标资金继续升降巨大的管理费用。

But the math worked for large investors. Venture capital partnerships, unlike those in other asset classes, are designed to have a ten-year life but typically last for as long as 14 to 16 years. Institutional investors fund their venture capital commitments through capital calls, which require investors to meet their commitments in tranches instead of all at once. Historically, investors have not had to put up the total amount. Early cash distributions, available when portfolio companies were sold or went public, often helped offset some of the investors’ future commitments.

随之而来的是,机构,基金的帮助下advisers and consultants, purposely exceeded their targeted allocations, convinced that thanks to the avalanche of cash distributions, they could meet their commitments using distributions received and would never have to put up all the money.

But with an IPO window that has been boarded up and a mergers and acquisitions market that is highly selective, few venture capital funds have made any really significant distributions since 2001. As a result, during the recent financial crisis, in which all asset classes plummeted in value, many institutional portfolios were left with huge overallocations to venture capital.

在现金挤压和遭受一些最严重的整体投资结果中，许多最忠于的大学捐赠和公共养老基金都急剧削减他们的分配。据报道，哈佛，普林斯顿，斯坦福和耶鲁大学院长哈佛大学，斯坦福大学，曾经在最伟大的风险投资冠军中销售了其在现有伙伴关系中的一些股份，这是美元的40美分。

但是，减少可能只是行业需要生存的东西。“捐赠金钱的收缩是我认为是一个积极的东西，”天使投资者和莲花开发公司的创始人Mitchell Kapor说：“莲花开发公司的创始人”VC资金有太多的投资资金，这导致了问题。现在提供和需求更好。“

一位行业观察家表示，从风险投资中获得机构资金是其复苏的第一步。”风险投资从来都不应该被专业化，作为一种资产类别，每年都可以从大型机构投资者手中获得固定资本，”Paul Kedrosky说，他是尤文玛丽恩考夫曼基金会的高级研究员，该基金会是致力于促进创业的最大基金会。估计有20亿美元的资产。”它是一个经历了巨大起伏的小企业，而且当年复一年地向它常规分配过多资本时，它的业绩很容易被压垮。”亚博赞助欧冠

数字清楚地证明了这一点。上世纪90年代末增加的资本承诺是对风险投资行业提供卓越回报能力的回应——在这十年的前半部分，顶级基金的年回报率高达两位数——但随后的业绩下滑发生在行业最高的筹资水平上。”解决办法是大约在1993年回归风险资本。他的解决方案是：许多规模较小的基金，比如3000万至1.5亿美元，还有一些规模稍大的基金，高达2.5亿美元。他的预测是：很多人退出公司，每年投资于基金和企业家的资金减少。

That scenario is already being played out. Venture capital funds’ investments in portfolio companies fell from $28 billion in 2008 to $17.7 billion last year — less than 20 percent of the $94.1 billion the industry invested in 2000. Although big VC funds continue to sit on large pools of capital, nursing existing investments they cannot sell or take public, venture investing is now being influenced by angels and small funds with proven track records.

Case in point: angel investor Kapor, the founder of software company Lotus, which IBM Corp. bought for $3.5 billion in 1995. His San Francisco–based Kapor Enterprises is a vital part of a band of angels that spearheads technology investing across the nation. And Mundkur’s Artiman Ventures, launched in 2000, is one of a group of new funds that has carefully structured itself to invest in an entrepreneurial economy with limited access to capital and markets.

如今，小型风险投资基金，如纽约的里程碑风险投资合伙公司（millestoneventurepartners），管理着一个主要来自个人投资者的资金池，现在是最成功的基金之一。MVP由前投资银行家托德·皮特里和埃德温·古德曼于1999年创立。两人以1000万美元的资金池起家；该基金于2001年以1 310万美元结案。

根据Pietri的数据，2001年推出的所有风险基金平均回报率为实收资本的38%（基金实际收到的资金，而不是承诺资本），MVP的里程碑II回报率为160%。剑桥联合公司（Cambridge Associates）的数据显示，其内部收益率约为16%，远高于同期推出的上四分位基金5.5%的平均水平。

甚至一些已经被转变为Megafund经理的风险资本家也会回到小型资本高效的VC资金的想法。1969年推出了他的第一个基金的纽约的Alan Patricof - 2008年推出了Apax Partners的Apax Partners，为350亿美元的多元化股票池 - 创造了7500万美元的专注于早期业务的7500万美元。

“最具吸引力的风险投资基金是已经调整到市场的资金，”Fairview Capital的管理合伙人争夺竞争合作伙伴，这是一家位于哈特福德的28亿美元的基金基金公司。投资者彻底削减了他们投资和承诺的规模。

“Endowments — investors of choice for venture capital — and pension funds are discovering they overallocated assets to venture capital in anticipation of faster distributions and overoptimistic returns,” says Price. Now that the value of their assets has plummeted and they need liquidity, they are not getting back into venture capital in a hurry. “Even venture capitalists with storied histories are not in a position to attract new investors,” she adds.

尽管大多数守门,基金的基金孔蒂nue to go after big-name VCs, Price’s firm has emerged as a champion of the smaller, innovative venture funds that often are ignored by the larger asset allocators. Price sees the future in partnerships such as Mundkur’s Artiman. The first Artiman fund was launched in 2000, perhaps the least propitious time in VC history to start. “The Internet bubble had already burst; the telecom bubble was about to,” recalls Mundkur. And after investing in two deals, the fund suspended investing. “The conditions just weren’t right,” he says.

Artiman began reinvesting in 2004 with $180 million in capital and started a second fund two years later, also with $180 million. In addition, it has a separate pool of capital that it uses for late-stage financings. At a time when some of the big funds are known more as asset gatherers than company builders, Artiman’s decision to keep the funds small is deliberate. Even in the early 1990s, when Mundkur was an entrepreneur — he was founder and president of Equator Technologies, a maker of programmable media processors that was sold to Sony Corp. in 1998 — the largest venture funds were in the $100 million-to-$150 million range, he notes. The key to smaller funds is that it takes only two or three big wins to be successful, Mundkur adds.

At a time when liquidity and exit strategies are issues that dominate venture capital, Artiman is focusing on building strong, stand-alone companies in what Mundkur calls white spaces, or large markets that go unnoticed by most venture capitalists because they fall outside of rigidly defined industry segments. White-space companies typically apply well-known technologies in nontraditional ways.

Take Artiman’s investment in Cellworks Group, a drug development company that is exploiting advances in proteomics, or protein-based analysis, to come up with new drugs at a fraction of the industry’s average cost. Proteomics isn’t new; what’s novel is applying it to drug development as a way to drastically cut costs.

Using this strategy, Mundkur is optimistic about the IPO market, even today. That’s because of the uniqueness of his firm’s portfolio companies, he says, and their potential to be independent stand-alones, for which the natural exit is an IPO.

Still, there are challenges to Artiman’s style of investing. Its emphasis on building sustainable companies in white spaces limits the number of deals it can do each year: never more than four or five. And in the tradition of old-style VC firms, Artiman doesn’t flip its portfolio companies, so its holding periods are longer than is typical. Says Mundkur, “While most venture investors tout four-to-five-year holding periods, we are at six to seven years.”

In addition to staying small and targeting previously unexplored investment opportunities, today’s successful venture capital funds are organizing themselves around fund communities. In Virginia, Arthur Marks’s Valhalla Partners is part of VC 2.0, an informal group of about 30 venture firms that cap the size of their funds at $250 million. They invest primarily in technology founders — entrepreneurs who get their hands dirty — and they like to keep their investments small, to no more than $1.5 million. Although most of the venture capitalists in the group are experienced investors and seasoned entrepreneurs, they have shunned the kind of publicity that many of the 1990s Internet VCs craved. The group insists that venture investing should be a collaborative process, not the intensely competitive one that helped inflate valuations and create the destructive “me too” companies of the 1990s.

The group also believes that its most likely exits will come through sales of companies rather than IPOs, and it’s likely right. Among technology companies, Cisco Systems, Hewlett-Packard Co., Intel, Microsoft Corp. and, most recently, Google — which has purchased 55 companies in the past two years — continue to be active buyers.

准备一家公司去公众并遵守财务规定，不仅可以占用稀缺现金，而且也可能分散公司的管理，指出瓦尔哈拉的标志。“我们开始假设我们将获得所有投资组合投资，”他说。因此，从一开始，Valhalla与其投资组合公司合作，以识别潜在的合作伙伴。

In 2004 it invested in RealOps, a start-up with a software program that helps large companies manage their computer installations. Valhalla estimated that the company needed a $5 million initial investment to build a prototype and start marketing and a co-investing partner to fill out much needed areas of expertise. Valhalla didn’t find the right partner, so it decided to invest the entire $5 million itself. Once RealOps had the working prototype in place, Valhalla sank a further $8 million into the company to help it ramp up. RealOps was acquired by BMC Software in 2009 for $52.5 million.

Even in New York — where success among venture capitalists is often measured more by blog readership than by investment performance — small funds are regaining the limelight. In July, in the midst of a swooning stock market, Milestone Venture Partners scored big when Medidata Solutions, a clinical data company, went public. MVP’s total investment of $552,500 in Medidata yielded a 37 times return and a 1.6 times multiple of its entire fund.

“We were supposed to be fearful that Medidata was undercapitalized given that it was only raising $1 million when the dominant company in the market at the time, Phase Forward, had already raised a war chest of many tens of millions of dollars,” wrote MVP co-founder Pietri in the firm’s newsletter this summer. “But the reality is that the best applied technology companies need only a modest amount of equity capital to be very successful.”

MVP的善意表示，机构投资者告诉他，该亚博赞助欧冠基金对他们来说太小，因为他们在不代表巨额资产的情况下投资。他们认为，它在早期公司的初始投资将在惩罚后的融资中罚款，或“被粉碎”或“洗掉”。换句话说，公司将耗尽现金，而MVP则无法支持它们。

But the firm stuck to its guns, often being in the lead group of investors in its companies, helping them build management teams and business strategy and thriftily providing follow-on financing. Since 2001, MVP has raised a $54 million fund and may soon launch Milestone IV.

如今，随着机构投资者从传统的风险投资领域撤出，米奇•卡波（Mitch Kapor）等天使投资公司（angels）开始在早期投资中填补大部分空缺。Kapor说：“风险投资不一定是一个资本密集型或官僚化的过程。”他解释说：“我所看到的是，许多最优秀的新初创企业，包括那些有着惊天动地雄心壮志的企业，都不需要风险资本来启动。”由天使投资人和小型专业基金（基本上是成熟的天使）资助的50万至75万美元的种子轮，正成为消费者互联网机会中最佳企业家的首选。”

Kapor’s recent investments include Get Satisfaction, a crowd-sourced customer service; CubeTree, which provides software to create a social network within a company to encourage collaboration; and DropCam, a YouTube for netcams. Kapor notes that start-ups have become cheaper, require fewer people to run and take less time to market because today’s platforms offer a more advanced starting point. Entrepreneurs can get access to both capital and expertise from angels and seed funders. “There is a whole generation of successful entrepreneurs with capital who form the core investors in this new band,” he says.

This generation of investors is helping the venture capital industry fulfill its basic purpose — financing innovation and bringing it to market — which, despite its recent troubles, hasn’t changed.