US venture capital industry not necessary condition in driving ...

Contrary to popular belief, the US venture capital industry is not a necessary condition in driving high-growth entrepreneurship.

According to Right-Sizing the US Venture Capital Industry, (pdf) a 2009 study by the Ewing Marion Kauffman Foundation, America's leading entrepreneurship think-tank, while venture capital will continue to be crucial to some forms of high-growth companies, the report concludes that the sector?s size must be reduced to be viable. The venture industry has seen stagnating and declining returns coupled with rapid expansion in venture capital assets under management in recent years.

The study says that there is no denying the importance of the venture capital industry. Despite being relatively young, having only reached its modern form in the last thirty years, this business of investing risk capital in growth companies has had many major successes. Some of the best known and most successful growth companies and brands in the world are venture-backed, including Apple, Google, Genentech, Home Depot, Microsoft, Starbucks, Cisco, and many others. The National Venture Capital Association, the industry?s main lobbyist, claims a study it sponsored shows that venture-backed companies from 1970?2005 accounted for 10m jobs and $2.1trn in revenues by 2005, as well as representing 17% of US gross domestic product (GDP).

Study author, Dr. Paul Kedrosky, senior fellow at the Kauffman Foundation and an entrepreneur, says these are impressive numbers. But he says noting that venture capital played a role in the early days of these storied companies is not the same as saying the venture industry deserves full credit for these companies any more than does, say, Pacific Gas & Electric, which provides electrical power to Bay Area homes and businesses. Merely being the provider of a service to a company is separate from having demonstrated that the company could not have obtained that service elsewhere. There are many providers of risk capital, ranging from banks to angels, and a smaller venture industry (or a larger one) might well have had as much success, or more, at funding the same companies.

Kedrosky said while it's not possible to conduct a randomized experiment to disentangle venture capital from the resulting companies and their eventual success or failure, some facts are known. "For example, we know that only a tiny percentage (less than 1%) of the estimated 600,000 new employer businesses created in the United States every year obtain venture capital financing. That figure has not changed materially in recent years, and likely never will. Most of the companies created in the United States in any given year are sole proprietorships and service companies, less capital-intensive companies that almost never seek or obtain venture financing."

The study said that growth companies typically require more capital than sole proprietorships and service companies, and thus are the main focus of the venture capital industry. Such companies, however, represent only a subset of startups. Even among that latter group of companies, however, venture capital?s presence is far from widespread.

The foundation studied the prevalence of venture capital financing among companies on the Inc. 500 list (Inc. is a US business magazine)? of the fastest-growing private companies in the United States. "Looking across ten years of that list - - roughly 900 unique companies from 1997?2007 - - we found that approximately 16% of the companies had venture capital backing. In other words, even among the fastest-growing and most successful companies in the US, less than one-in-five companies had venture investors. Such companies almost certainly could have venture investors, if they wanted them, so the absence of venture capital should generally be read as a sign that these growth companies saw no need to take external capital from venture capitalists, whatever the merits of such capital might be."

?"The venture industry needs to shrink its way to becoming an economic force once again," said Dr. Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. ?To provide competitive returns, we expect venture investing will be cut in half in coming years. At the same time, lowering valuations and improving overall exit multiples should help resuscitate the industry.?

"Professionals in the venture industry have gotten comfortable with the way their industry is set up in terms of size, structure and compensation," said Dr. Kedrosky. "It has been a profitable business for many. However, our study indicates venture participants now need to overcome their resistance to change, so they can most effectively fund entrepreneurs and offer investors competitive returns."

While the economy clearly impacts industry results, the study cited other performance factors that predate the current downturn. The industry itself might be structurally flawed: The core markets that made it successful - - information technology and telecommunications - - are now mature and less capital intensive. In addition, exit markets are unwilling to take on young and unprofitable companies. Given that, the study says, the real question for venture is one of capital and size. As opportunities shrink, the venture business should shrink too, possibly by as much as 50%.

"It's inevitable," said Kedrosky. "Whether it realizes it or not, whether it wants to or not, the venture industry has to change."

State of US VC

The US venture capital industry had average annual negative returns of -2.0% in the 10 years to Dec 2010 and apart from high profile IPOs (initial public offerings), the overall trend is down. Last year 72 VC-backed companies went public in the US, according to data from Thomson Reuters and the National Venture Capital Association. Over the last decade, the annual number has never reached 100 and has averaged fewer than 50.

However, excluding the Internet boom, when annual IPOs twice exceeded 270, the US averaged 160 a year from 1990-1994, three times the current rate.

IPOs are very important for the industry as an exit route for VCs, with potentially high gains.

The National Venture Capital Association reports in its 2011 yearbook that new commitments to venture capital funds in the United States again decreased in 2010 to $12.3bn from the post-bubble fundraising peak in 2006 when $31.8bn was raised. This reflects an ongoing difficult fundraising environment in part created by recent economic stress. However, most of the decrease reflects the contraction of the U.S. venture capital industry that began after the technology bubble burst in 2000 and the industry sought a more reasonable size band.

In 2010, 157 funds raised $12.3bn, down 25% from 2009, which itself was down 38% from 2008. Overall, the 2010 amount raised was down 61% from the 2006 post-bubble peak.

In 2010, total venture investment increased 20% from 2009 levels from $18.3bn to $22.0bn. Putting this in perspective, 2010 investment remained 22% below 2008 totals and 26% below 2007 which was a post bubble high. Many in the industry welcomed the resizing of the industry?s levels from the near $30bn level seen in 2007 to just above $20bn in 2010.

The yearbook says that after years of taking on 1,000 or more new companies each year, the industry in 2009 funded 772 first time companies but that count increased in 2010 to 1,001. Regardless of the actual count, it said it is important to remember that each first funding represents a fresh commitment by venture capital funds to the future.

The contention for venture capitalist attention (and dollars) between existing later stage portfolio companies and newly-arriving business plans continues. There are still a record number of companies in portfolios in the later stage of development which in most other environments would have already gone public or otherwise been acquired. As the IPO and acquisition counts increased in 2010, the number of later stage rounds fell. In 2010, 29% of investment was made into later stage companies. By contrast, 32% of the capital went into Seed and Early Stage companies.

The life sciences share of the venture capital investment scene backed off somewhat but remained at near record levels. In 2010, 17% of the money went into biotechnology, 10% into devices, and 1% into healthcare services. By contrast, in 2009, 20% of total dollars went to biotechnology companies, 14% went to medical devices and equipment and 1% went to healthcare services. Clean technology is the industry?s most visible emerging sector with $3.7bn invested in 2010, up 61% from the 2009 total but still below 2008?s record amount of $4.0bn. The 2010 investment total represents 17% of all venture investment.

California companies received just over 50% of the total investment dollars although individual centers of sector strength and strong deal flow drove investment to 46 states and DC.

Investment by corporate venture capital groups increased to 9% of total US investment in 2010. Approximately 14% of all rounds involve at least one corporate venture group down from 19% two years earlier.

Source: http://www.finfacts.ie/irishfinancenews/article_1022358.shtml

beltane randy couture vs lyoto machida pope john paul misery divine mercy sunday godzilla gaddafi son killed