The NVCA polled VCs and found investors attributing the whiff to a variety of short-term shocks such as the credit crunch and Sarbanes-Oxley.
But the story of an increasingly anemic IPO market goes back more than a decade. In 1992, a VC might expect as much as 65% of his or her exits to be via IPO. That number fell steadily to 10% by 2005 and has continued to fall since.
The VC industry is laboring under a set of outdated assumptions, a structure optimized for conditions no longer applicable and an unwillingness or inability to embrace the tectonic change it is undergoing. The hand wringing about various short term shocks (such as skittish investors) that sunk the second quarter’s IPOs misses any serious discussion of the long-term systemic shifts that many VCs have failed to act on.
I offer five forces that underly the observable change in modern venture capital:
- The technology industry has matured to the extent that startups are viewed as outsourced R&D by big companies.
- The consolidation of technology verticals via either winner-take-all competition or multi-billion dollar acquisitions has decreased the number of would-be customers and acquirers for focused technology offerings.
- The over-availability of growth capital promotes competition among startups for scarce resources such as technical employees and early-adopter customers and raises development costs accordingly.
- Attractive investments may be increasingly found through creative deal sourcing and structuring rather than sexy technologies, big markets or “hot” entrepreneurs. Similarly for successful exits.
- Successful firms have formalized their succession planning to preserve their virtuous cycle, making specialization an increasingly attractive strategy for first time funds.
What else goes on this list?