He who loses less, wins? Venture capital in the 2000s was much akin to the joke about the two campers who cross paths with a bear. As the angry bear begins charging out of the woods towards the campers, the first camper starts putting his sneakers on. The other camper screams, “It’s no use, we’ll never be able to outrun the bear!” And the first camper yells back, “I don’t need to outrun the bear, I just need to outrun you!”
Over the past decade, venture capitalists could claim top-quartile performance just by showing smaller losses than the rest of the pack.
The start of 2010 provides a clean slate—that is, after we break out the scorecard and grade last year’s predictions.
Last January, I envisioned a 2009 cleantech price correction, which pretty much hit the mark. While media gushed over the billions investors poured into cleantech during 2009, they failed to mention at what price and on what terms those investments were made.
Several VC-backed companies with valuations deep into the 9-digits opted for the M&A escape hatch (SunEdison, Optisolar), taking haircuts in the process. Other high-profile pioneers like GreenFuel closed up shop and called it a day. Even cleantech’s most promising ventures were unable to avoid the reset. Case in point: Solyndra, which just last month filed for its long-awaited IPO. The company’s valuation was recalibrated during its $286M Series F financing, priced at less than $4 per share, compared to a prior Series D-3 offering at $23 per share.
So what does 2010 hold in store for VC investors? I’m foolhardy enough to once again venture predictions. Behold the biggest stories in the coming year:
1) Venture-backed IPOs rebound smartly, with 50%+ first day price jumps on name brand offerings from Facebook, LinkedIn or Zynga. Among the S-1 clutter, another big beneficiary will be IPOs from smaller, little-known, and speculative-grade companies that also make it out. The visceral response to many IPO filings: Who?
2) At least one famed VC partnership fractures or sees an orderly wind-down, with insider gossip eventually leaking out. The changing of the venture guard moves full steam ahead, as weak fund performance from the lost decade finally forces LPs to question historic allocations to “franchise funds”.
3) A large, non-traditional investor enters the venture fray, boasting a very long fund duration (~20 years) vehicle focused on science and technology. Commence discussion on whether the traditional 10-year fund life makes structural sense for early-stage life sciences and energy investments.
4) Stealthy cleantech companies unveil. After years of intrigue and speculation, not to mention tens to several hundred million dollars invested, several energy technology companies finally lift the curtain and introduce themselves to the world. Will the emperor be wearing clothes?
5) Spike in biotech M&A. December 2009 served as an excellent indicator of what’s to come, with more than $1 billion returned to venture funds through the acquisitions of Acclarent, Calixa and Gloucester. Expect this month’s JP Morgan healthcare conference to play host to the industry’s ultimate speed dating session.
6) Semiconductors regain luster. After years spent languishing as pond scum in the VC pool, the public market chip rebound finally extends to its capital-starved, private brethren. Expect several IPOs and profitable M&A for some of the largest revenue generators.
7) Solar failures litter VC landscape. Schumpeter’s gale of creative destruction blows through the 250+ private solar companies. A handful of heavily-funded solar PV and CPV companies flame out, while sector leaders like First Solar consolidate their market position.
8) Energy investors swap wind and solar for abundant natural gas and carbon-free nuclear. Looking to replace a large swath of coal-fired power for base-load electricity generation? Natural gas and nuclear are not just attractive base-load alternatives—they are the only options.
9) Russian oligarchs and other foreign investors snap up late-stage U.S. tech. DST’s investments in Facebook and Zynga serve as a role model. Let’s hope they encounter more success than the sovereign funds that purchased big stakes in U.S. investment banks.
10) Return of the VC mystique. A counter-intuitive prediction, but one that reflects the above assumptions and data points. A select few IPO grand slams create massive returns and fanfare, sparking a resurgence of interest in the asset class. LPs actually begin to talk about new opportunities in venture capital!
My Take on 2010
Count me in the bullish category. In contrast to more cautious views in 2008, the venture marketplace has finally priced in reality. At Lux Capital, we’re finding far more value in venture investments today than throughout the 2000s. On a recent flight back from the West Coast, my seat-mate was a well-regarded LP, invested in many leading venture funds. He told me that he is “super bullish on VC”, more positive today on the asset class than at any time over the past 15 years.
Sure, there are structural challenges that serve as near- to intermediate-term headwinds. Outside of a few corner cases, public liquidity does not exist. Strategics are only now coming out of their shells to scavenge for M&A opportunities. Equity values have been crushed, wiping away years of incremental value creation. Investors today demand liquid assets that can be sold at a minute’s notice before the close of trading.
But historically, capital-scarce environments like today are exactly the times when fortunes can be minted. Genuine-article growth businesses are fetching valuations that bring later-stage share prices below seed rounds. New investors no longer require bubble markets to earn attractive risk-adjusted returns and gain some margin of safety. And don’t forget: in a slow-growth economy, venture capital is the only asset class that can create un-levered growth.
Peter Hebert is co-founder and managing partner of Lux Capital, focusing on investments in advanced materials and energy. You can read his past peHUB posts here.