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Venture Capital in Europe: Departures Ahead
According to a very good article by (the relaunched) Red Herring, the European venture capital industry will be undergoing a major shake-out in the next year or so. There are quite a few interesting issues and facts in the article, e.g. a scary chart showing the steady decline in VC investments over the previous quarters with no uptick in sight.
But -- because I had tackled related topics in my thesis -- I'd like to focus on the projected exodus of venture capital firms, which is due to a culmination of three specific issues:
- First, many venture capitalists were started during the frenzy of the 1990s and had raised their first fund(s) during that time. The liquidation of these funds is due very soon. When a fund is liquidated, all investments must have been exited before, i.e. taken public via IPO (which is the best scenario), sold to another corporation (so-called trade sale, which is nice as well), sold back to management or to another VC (which is seldom, and even then only slightly desirable), or liquidated (worst scenario, of course). The fund liquidation then is the distribution of all the money gained from the exits to the original venture capital investors (pension funds, individuals, etc.).
- Second, the exit market is basically closed right now. IPOs are impossible. Trade sales are seldom and far in between. And all the other exit routes are mediocre to disastrous in their result.
- Third, venture capitalists usually raise their next fund while their old fund has not even been liquidated yet. The investors being approached for the new funds usually ask the venture capitalist for performance numbers regarding their previous funds.
OK, now combine these issues: Seasoned venture capitalists will usually have old funds, liquidated during the 1990s or before, which they can show off to new investors as a signal for their quality. But what do young venture capitalists do, who haven't been able to liquidate one single fund? In boom times, they might show off a successful IPO or trade sale from their still-running fund. Or they could show how liquidation of their current fund will show a positive return for the investors with the money already taken in.
But both strategies don't work these days. Liquidation of current funds will almost certainly generate negative returns. And IPOs or trade sales are almost non-existent. Ergo, most young venture capitalists will have an extremely hard time raising follow-on funds. And a venture capitalists without a fund, well, it's like a car manufacturer without a production system, i.e. DOA.
Tough times indeed.