TrueBridge Market Analysis: State of the Venture Capital Industry
As part of our annual analysis of key venture capital industry trends, this report examines fundraising, investments, valuations, exits, and net returns to limited partners.
TrueBridge prides itself on a data-driven approach to the venture industry. In addition to extensive due diligence processes, the firm regularly gathers, analyzes, and publishes information about the venture industry and trends.
As part of our annual analysis of key venture capital industry trends, this report examines fundraising, investments, valuations, exits, and net returns to limited partners.
“Capital has become weaponized as a way to create a competitive moat around a startup’s business — ostensibly giving it so much money that investors become de facto kingmakers for the companies they back, rather than simply enablers for success."
- Jonathan Shieber, TechCrunch
As part of our annual analysis of key venture capital industry trends, this report examines fundraising, investments, valuations, exits, and net returns to limited partners. Prudence and caution characterized the 2016 venture market, but quickly became passé as the industry forged ahead and set numerous new records in 2017. These milestones included the highest number of seed and early stage funds ever raised, as well as the most capital invested globally. Massive financings drove this dynamic, as deals funded actually decreased year-over-year. According to Pitchbook, unicorns accounted for less than 1% of transactions in 2017, but such financings represented more than 22% of the industry’s deal value.
“Venture-capital firms forged ahead raising new capital, even as the industry grappled with declining liquidity, repercussions over sexual misconduct and the rise of alternative funding sources like initial coin offerings.”
- Yuliya Chernova, WSJ Pro Venture Capital
As part of our annual analysis of key venture capital industry trends, this report examines fundraising, investments, valuations, exits, and net returns to limited partners. While the first half of 2015 was a rip-roaring start for the venture capital industry, by the second half of the year, VCs adopted a more measured approach to their investments, and excitement tempered. In many ways, 2016 played out the same way that 2015 ended, and ultimately, the venture capital industry remained at its “new normal.” Though 2016’s decline in valuations, dearth of public exits, and macroeconomic uncertainty prompted VC managers to move cautiously, the IPO market has been off to a strong start, beginning with Snap’s $3.4 billion debut on NYSE in March of 2017. And plenty of capital remains for startups and entrepreneurs to tap into nascent but promising technologies, including those related to robotics, drones, autonomous vehicles, augmented reality, virtual reality, machine learning, and artificial intelligence.
It’s worth remembering that some of today’s most successful startups all started during or after the 2008 financial crisis. We’re excited to see the next cohort of companies to emerge from this similarly uncertain, but compelling, time for VC.
As part of our annual analysis of key venture capital industry trends, this report examines fundraising, investments, valuations, exits, and net returns to limited partners. 2015 began as another banner year for fundraising, investing, and valuations. Even as the longtime trend of venture capital consolidation continued, and the number of firms raising new funds decreased, we saw NEA raise the largest-ever venture fund at $2.8 billion. We saw $72.3 billion of venture capital invested across all stages—a post-bubble record. More milestones were reached as seed and early stage valuations reached post-bubble highs in 2015, while late-stage valuations reached an all-time high for the third consecutive year. But beginning in the second half of 2015, the IPO and M&A markets showed signs of weakness, and public markets grew increasingly volatile, causing VCs to grow more cautious. Overall, we believe we are witnessing both a return to the “old normal” and the beginning of a new era of innovation.
As capital continues to concentrate with fewer firms, investors are optimistic about the investment opportunities in front of them, the industries that remain ripe for disruption, and the long-term bull market for technology.
As part of our periodic analysis of key venture capital industry trends, this report examines fundraising, investments, valuations, exits, and net returns to limited partners. Overall, our analysis indicates that while the direction of several trends changed course, the trend of consolidation of venture firms and capital in the industry continued throughout 2014. VCs raised and invested significantly more capital in 2014 than the prior year, yet fundraising continued to concentrate in the hands of relatively few well-established firms. Late stage valuations reached an all-time high for the second consecutive year, thus shining a spotlight on the growing number of unicorns, or venture-backed private technology companies valued at over $1 billion. While valuations continue to fuel the bubble debate, the opportunity to invest in the next generation of highly disruptive, innovative, rapidly growing technology companies is exciting and promising, particularly with the backdrop of a healthy exit environment and impressive asset class returns.
While some late stage valuations may be a mirage, the opportunity to invest in the next generation of highly disruptive, innovative, rapidly growing technology companies is exciting and grounded in reality.
As part of our periodic analysis of key venture capital industry trends, this report examines fundraising, investments, valuations, exits, and net returns to limited partners. Overall, our analysis indicates that capital has continued to concentrate in the hands of relatively few, demonstrating that, by and large, the experienced venture capitalists with unique competitive advantages, strong track records, and excellent reputations among entrepreneurs are able to raise and invest sizable pools of capital today. Based on data through the end of 2013, we believe that the industry is right-sizing and that key metrics, such as fundraising and investment activity, are reasonable and sustainable. That said, currently there are certain trends and segments of the market that should be viewed with caution. We are optimistic that the current transformations of the technology sector will result in strong returns for our limited partners, and we believe we are well positioned to capitalize on these exciting shifts in the industry.
Investing with a select number of the highest-quality VCs – those who have the best deal flow, vision, ability to add value, and track record – remains critical to generating good returns.
As part of our annual analysis of key venture capital industry trends, this report examines the venture market as a whole, including fundraising, investments, valuations, and exits. In contrast to prior reports, this year we also consider net limited partner returns, which have improved significantly for recent vintage years. Our 2012 study of the state of the venture capital industry comes on the heels of the Kauffman Foundation’s scathing venture capital piece, which assigns primary blame to limited partners for poor venture capital performance. While it is true that many LPs have regrettably funded marginal managers, our belief is that while the early-2000s suffer from seemingly poor returns, history would show that these will improve over time as those vintages continue to mature. At the same time, the strong net performance of vintage years 2007 and onward is very notable given their youth.
The venture capital industry continues to achieve a more sustainable capital base, as we have consistently discussed in the past, and that the “flight to quality” of capital in the industry will continue to characterize the venture market going forward.
Much has changed since our 2010 State of the Venture Capital Industry report. Last year, headlines about venture firms shuttering, poor recent industry returns, and venture capitalists exiting the industry abounded. Shift to early-2011, and talk of another venture capital bubble has taken the place of malaise. To avoid bold predictions, the 2011 report largely strays from the bubble debate (while mentioning that this time feels different). Like the 2010 version, the report blocks and tackles, examining industry trends around four key areas: fundraising, investments, valuations, and exits.
Our core tenet – that it is difficult to time the venture capital market and the best managers will consistently outperform public markets – notwithstanding, now may be a better time than most points in the past 10 years to commit capital to the venture asset class, with capital committed today well positioned to earn attractive returns.
In our State of the Venture Capital Industry report last fall, we emphasized the difficulty in “timing” the asset class, since it is nearly impossible to access the best managers intermittently, and difficult to predict the best time to invest in seed and early stage companies that will achieve liquidity in five to ten years. At the same time, we suggested that for a number of reasons, now appears to be a better time to commit capital to the asset class than any point in the past 10 years (a self-serving exception, we must admit!). More time to digest the Great Recession’s specific impact on the venture capital industry, and a larger sample of relevant industry data have added substance to our argument.
Less capital and fewer active firms, with the stronger firms surviving, leads to lower valuations and more truly innovative companies receiving capital relative to "me too" businesses. And as a result, we believe returns over the next 10 years have the potential to be attractive relative to those of the past 10 years.
As a general premise, we adhere to the “endowment model” of investing and believe venture capital has a place within every diversified portfolio. We think it is difficult to “time” the market as well as access the best managers intermittently, and that it therefore makes sense to invest consistently in the asset class. It is also our belief that investors that have done so over long periods of time have been richly rewarded. While speaking from an admittedly biased perspective and perhaps offering more tactical guidance than normal, we hope this piece offers our perspectives on the current state of the market, given the profound impact that extraneous factors continue to have on the venture capital industry. It is based on experience, empirical research, and ongoing discussions with our managers.
Venture capital managers and their entrepreneurs should emerge from the downturn more conservative and focused, and thus better able to generate attractive returns for their investors.
This whitepaper reviews the current private equity climate in India, including an analysis of the country’s historical GDP growth, the macro-economic challenges venture investors are facing today, and TrueBridge’s outlook on the future of private equity in India. While the India growth story remains intact, returns have proven elusive for many managers and investors, especially those invested in dollar-denominated funds. The reasons for this shortfall are numerous, but include several macro-economic factors outweighing solid business fundamentals. While the Indian private equity market continues to mature, thereby offering hope to investors, it is unclear when and if the macro-economic environment will improve such that investors will be rewarded. In the long run, the growth story coupled with strong business fundamentals should ultimately prevail. The question, however, is this: Can investors wait that long when attractive returns can be earned elsewhere?
For the future of private equity in India, we anticipate that the growth potential of the country, coupled with strong business fundamentals, will likely prevail in the long term.
This sector trends report discusses three large technology shifts taking place in computing infrastructure today (cloud computing, SaaS, and mobile), as well as their impact on enterprise software and venture capital investments. Since the dawn of Silicon Valley, large shifts in computing and the provisioning of software have led to significant wealth creation opportunities. Examining the history of large tech businesses over the last twenty-five years is instructive, as two different narratives begin to emerge. In the first, young venture-backed upstarts offer a new product or service and experience explosive growth, disrupting an existing industry and yet at the same time creating opportunities for those few incumbents nimble enough to adapt to the new challenger and operating environment. The second narrative is more familiar to observers of the venture capital industry, with many of the old incumbents simply withering away.
Today there is an enormous technological shift in the way that software used by businesses is created, sold, delivered, and utilized. This is the next massive wave in enterprise computing and has Silicon Valley abuzz with excitement.
As investors survey the venture capital industry and note its returns over the past ten years, many are discouraged. Common sentiments are that returns have been poor and the venture capital model does not work. These ideas frequently appear in both general business journals and in tech-focused media outlets and could perhaps be called the “normal view” as they reflect conventional wisdom. Forbes has touted “Venture Capital’s Coming Collapse,” while the Financial Times screams that venture capital is “hit by excesses.” BusinessWeek believes that “fear of a shakeout is making for less venturesome capital.” Finally, The Economist notes that “institutional investors have been badly burnt putting money into new ventures over the past five years” and are “tempted to say good riddance.”
Building a venture portfolio requires long periods of illiquidity, attempts to gain access to managers who are often closed, even now, to new investors, and the difficulty of evaluating track record information when comparables might be opaque or hard to come by.
Steve Kaplan and Antoinette Schoar Abstract: This paper investigates the performance and capital inflows of private equity partnerships. Average fund returns (net of fees) approximately equal the S&P 500 although there is substantial heterogeneity across funds. Returns persist strongly across different funds raised by a partnership. Better performing partnerships are more likely to raise follow-on funds and larger funds. This relationship is concave so that top performing partnerships grow proportionally less than average performing partnerships. At the industry level, market entry and fund performance is cyclical; however, established funds are less sensitive to cycles than new entrants. Several of these results differ markedly from those for mutual funds.
Weighted by committed capital, venture funds outperform the S&P 500.
Josh Lerner, Antoinette Schoar, and Wan Wong Abstract: The returns that institutional investors realize from private equity investments differ dramatically across institutions. Using detailed and hitherto unexplored records of fund investors and performance, we document large heterogeneity in the performance of different classes of limited partners. In particular, endowments’ annual returns are nearly 14% greater than average. Funds selected by investment advisors and banks lag sharply. These results are robust to controlling for the type and year of the investment, as well as to the use of different specifications. Analyses of reinvestment decisions and young funds suggest that the results are not primarily due to endowments’ greater access to established funds. Finally, we examine the differences in the choice of intermediaries across various institutional investors and their relationship to success. We find that LPs that have higher average IRRs also tend to invest in older funds and have a smaller fraction of GPs in their geographic area, and that the performance of university endowments is correlated with measures of the quality and loyalty of the student body.
LP-specific differences in investment styles are significantly correlated with the performance differences between LPs.
Hochburg, Ljungqvist, Vissing-Jorgensen Abstract: Why don’t successful venture capitalists eliminate excess demand for their follow-on funds by aggressively raising their performance fees? We propose a theory of learning that leads to informational hold-up in the VC market. Investors in a fund learn whether the VC has skill or was lucky, whereas potential outside investors only observe returns. This gives the VC’s current investors hold-up power when the VC raises his next fund: Without their backing, he cannot persuade anyone else to fund him, since outside investors would interpret the lack of backing as a sign that his skill is low. This hold-up power diminishes the VC’s ability to increase fees in line with performance. The model provides a rationale for the persistence in after-fee returns documented by Kaplan and Schoar (2005) and predicts low expected returns among first-time funds, persistence in investors from fund to fund, and over-subscription in follow-on funds raised by successful VCs. Empirical evidence from a large sample of U.S. VC funds raised between 1980 and 2006 is consistent with these predictions.
Performance in the VC market appears persistent, suggesting VCs have skill. But why then do successful VCs not eliminate excess demand for their next funds by raising their carries?
At TrueBridge Capital Partners, it is rare for us to refer our limited partners to an external resource for insight into the nature of the venture industry. We cannot, however, pass up the chance though to share with you the latest research from two of the most renowned private equity academics in the United States. Steven Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance, as well as Faculty Director of the Polsky Entrepreneurship Center, at the University of Chicago’s Booth School of Business. Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, and organizes two groups at the National Bureau of Economic Research: Entrepreneurship and Innovation Policy and the Economy. Kaplan and Lerner recently collaborated on a paper for the National Bureau of Economic Research. Entitled “It Ain’t Broke: The Past, Present, and Future of Venture Capital,”(1) their study will soon be published in the Journal of Applied Corporate Finance. While their research is always of interest to us, we find this particular report worthwhile to share with you. The paper is very wide-ranging in its consideration of the venture industry, quantitative in its approach and methodology, and the authors’ conclusions match our own viewpoints on the nature of the industry in many ways. We believe their conclusions validate the strategy that TrueBridge has pursued in constructing our venture capital portfolios.
Kaplan and Lerner put the U.S. VC industry into its historical context, assess the current state of the VC market, and discuss the implications of that history and the current conditions for the future.
London Business School’s Coller Institute of Private Equity unveils new ground breaking research on PE performance: outperformance of 8% against S&P 500, as well as underlying problems with previous research studies. In “The Performance of Private Equity,” Chris Higson, a professor in the accounting group at London Business School, and Dr Ruediger Stucke of Oxford University, study how PE has performed relative to public equity markets and add to the weight of evidence that suggests manager selection in PE is of paramount importance to LP returns.
"For many years there has been ambiguity in the evidence about private equity performance, that has been troublesome both for the industry itself and for commentators trying
to understand the economics of buyouts. This paper finally resolves that issue and can be taken as definitive." - Higson
Since 2011, TrueBridge has authored articles for Forbes.com. TrueBridge covers a range of industry topics, including sector trends, venture-backed tech companies, and the overall state of the venture industry. Visit Forbes.com to read all historical TrueBridge posts.
Since 2011, TrueBridge has partnered with Forbes to construct The Midas List, a ranking of the top venture capitalists who have created significant value for investors and helped grow the golden technology companies of the future. Starting in 2017, TrueBridge and Forbes partnered to add a Midas List Europe to rank the top VC’s in Europe and the Middle East.
In helping generate each year’s List, TrueBridge applies the same rigorous process used to underwrite its own investments. This practice includes an analysis of quantitative data provided directly by general partners and by third-party data sources, which is supplemented by qualitative references gathered through the team’s unique and longstanding relationships.
With every List, TrueBridge and Forbes collect more data and work to make the process as comprehensive as possible.
In the spring of 2015, Forbes and TrueBridge co-launched the inaugural Next Billion Dollar Startups List to capture the next generation of the fastest growing, lesser known technology startups that may someday become billion-dollar companies.