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AlwaysOn Stanford Summit reporting for Read/WriteWeb. This afternoon there was an interesting presentation about the state of the venture capital market. Specifically, it started with a presentation by Paul Denninger, Vice Chairman of Jefferies & Co, entitled "Why Aren't VCs Happy?" and then Paul joined a panel moderated by Mark Stevens, a Managing Partner of Fenwick & West. Other panelists included Roger McNamee, a Partner at Elevation Partners (probably most famous because of their association with Bono of U2), Erik Straser, a General Partner at Mohr Davidow Ventures, and Bill Gurley a General Partner at Benchmark Capital.
I've attended a number of presentations and panels at industry events over the last six months on the state of the venture capital market. In addition, there seems to be a recurring meme in the blogosphere on the subject. To be honest, each of these panels - while interesting - seem to raise the same issues every time. They focus on how inexpensive it is to start and reach critical mass for consumer web services. Thankfully then, this panel today actually took a very different path. Paul laid out a number of interesting statistics around options for exits. It leads to some interesting questions that entrepreneurs need to evaluate.
Why Aren't VCs Happy?
Paul started by stating, "Despite the topic of my talk, I think that VCs are happy. But I believe they maybe shouldn't be." He then focused on a number of 'facts' and contrasted them with some common 'myths'.
The Technology M&A Market
The first myth he discussed was that the M&A market is back and going strong. Instead he argued that the technology M&A market is actually well below historical averages. He said that people are usually surprised by this, because there are some big deals going on nowadays and they are in the news. However, the fact is that most of the large (greater than $50M) exits have been to Private Equity firms. He explained that this time last year, there was a total of $40B private debt financing around companies that were looking to eventually exit to public capital markets. Today, there is $230 billion of private financing around private equity backed companies.
As if that reality wasn't grim enough, he also emphasized that the deals that are being done by public technology firms are actually being sold to a very small group of companies. Specifically, he explained that 35% of of all tech deals greater than $100 M were done by 10 companies, with a total market cap of $100 B.
The IPO Market
The other myth that Paul focused on was that "the IPO market is back". He said the fact is that before the bubble, in the early nineties the public markets had about 130 IPOs per year. This year, Paul believes we'll probably do fifty or sixty. He explained the reason it feels like 'the market is back' is because we went through a period of doing twenty-five or thirty a year.
So according to Paul, most VCs have been funding companies that are "reliant on the M&A market." He said it was 90% of VC liquidity last year. The increased focus on M&A has also meant a decrease in each of the last 6 years of the number of public tech companies. For context, before this streak of consistent declines you need to go back to 1988 or 1989 for when there were 2 straight years.
Right up to this point, everything Paul had laid out was consistent with things I'd heard before; but complimented by strong statistics. However, right then he delivered an interesting point about the future of the market.
Hypothetical Question: The Cisco Market Cap at the time of its IPO was $225M. Today, he asked would Sequoia Capital or other VCs have taken Cisco public, or would they have tried to shop it to AT&T for $250M? The data shared with us seems to lead to the belief that they would have tried to find an acquirer. The challenge is: would Cisco have created the value in the tech market and for other entrepreneurs if they had simply been acquired?
So VCs, Are You Happy?
At this point, the rest of the panel entered to discuss if they were indeed happy! After everyone introduced themselves, Roger McNamee said:
"Can I push back on what Paul just said? I've seen all the statistics he saw and I agree with the data. However, I think it doesn't matter, because predicting the future is fairly futile."
However, he continued by noting that "in the battle between fear and greed, fear is temporary but greed is permanent." Therefore, if there is money to be made, then Wall Street will pull those companies to the public markets out of greed.
Bill Gurley said that he actually felt like this was a fairly liquid time. But if he had one concern it would be "the lack of desire of executives to run these public companies." He explained that the average expense to become Sarbanes Oxley compliant was $2.5 million. He told a few good auditor jokes, but also continued to reiterate the concern around identifying executives who want to step into those roles.
While the panel was looking at this from the perspective of a venture capitalist, it did raise some interesting issues as an entrepreneur. What kind of company is each of us trying to build? Obviously, we each need to ultimately make sure we're creating value for our shareholders.
However, this panel showed a very different perspective - that maybe we're focusing too much on being acquired by a limited set of companies. What do you think?