Venture Capital and Principal Investment: BRIEFS - Three VC Specialists Weigh In

by Martha Lagace and Hilah Geer, HBS Working Knowledge

In the following brief reports, three venture professionals offer their perspectives on the industry.

A Few Words on the Long View
Starting with the promise, "I will only say the word 'Internet' once in the next 30 minutes," keynote speaker Richard E. Kroon could not resist poking a bit of serious fun at the rapid fall to earth of VC funds in the past year.

Richard E. Kroon

Kroon is chairman of the National Venture Capital Association and the chairman, since 1981, of CSFB Sprout Group, with experience in venture capital dating to 1969. He also offered serious advice as well as a sober assessment of career prospects for aspiring VC professionals. "Remember," he told the group, "the high-performing funds are, at best, one quarter of all funds; most investor fund choices are dismal. It's tough to pick these things. And lots of private equity professionals are not rich. Sorry."

The VC world was a cottage industry in its early days, Kroon remarked. Capital was relatively scarce, so fund professionals enjoyed the luxury of time to carry out substantial analysis before investing in new projects. Companies took a long time to mature, as well. Now, given the potential for quick exits, he said, there is much more "force-feeding" of business.

For aspiring professionals, he added, the downturn of the past year has a number of important implications. Future fund managers, for example, should not confuse personal competence with up cycles; and they should think about business trends such as globalization. "Can the American style of private investing transfer through other cultures, particularly where there are very, very entrenched family networks?" he asked rhetorically.

Additionally, fund managers had best refresh themselves in solid business fundamentals. According to Kroon, "The first three are cash."

—Martha Lagace

The Gold Mines of Venture Capital

Jeffrey C. Walker

There are still "interesting opportunities" in the venture business for investors who hang in there and invest across sectors, asserted keynote speaker Jeffrey C. Walker (HBS MBA '81), managing general partner of JPMorgan Partners. Walker also predicted that the VC market will probably bounce back within two years. "Today there's a whole lot less money than there was a year ago," he acknowledged. "Probably half. No more angels. Very few incubators. You don't see them around."

The money that remains is what Walker referred to as "gold mine venture capital": money from investors who have been around a while, and who understand the concepts of adding value and making individual investment commitments that endure at least four or five years.

VC investors also need the ability to link industries together, said Walker. Unless an investment is for health care services, which he believes is usually a regional business, it's important to take a global view, he noted, especially in telecommunications and information technology.

— Martha Lagace

Venture Industry Holds Steady
Separating fact from fiction was the goal of a keynote by a prominent research specialist, held early on in the conference at HBS.

John S. Taylor

John Taylor, vice president of research at the National Venture Capital Association (NVCA), utilized data from VC data collector VentureXpert to offer a sober view of the spike of 2000, as well as an optimistic take on the relative downturn of recent months.

One commonly misunderstood adjustment in the industry, according to Taylor's data, was a shift from buyout funds to VC funds. "Since 1998, in fact, venture capital has out-financed buyouts, " Taylor stated. The industry is not being driven by larger, late-stage deals. "We don't have fourth-quarter numbers yet, but it will be even more dramatic this year," he predicted.

Another related misconception that Taylor discussed is a widespread belief that venture capital has abandoned smaller seed deals. "If you read the headlines and believe the headlines," he remarked, "it's very easy to lose sight of the fact that there is money being raised for smaller rounds." Taylor argued that the very large deals skew the averages. In an NVCA survey, for example, the 1999 deals were broken down into three categories: 137 deals were $50 million or less, 143 were $50 to $250 million, and only 71 were over $250 million.

Taylor also took a look at the year 2000's wild ride. "Numbers are just out," he reported. "The year 2000 could be over a 100-billion-dollar investment year for the first time ever; but with $83 billion for the first three quarters and just over $100 billion in the fourth, we are seeing a slowdown." However, Taylor downplayed the tremendous spike as well as concerns over the relative downturn, arriving at an overall optimistic prognosis for the industry.

"2001 will be a lesser year than 2000, in part because valuations are coming down and you can still buy a lot of company for less money," he said. Taylor also described healthy restraint by the funds. "[Fund managers are] saying, 'Look, I just raised this megafund. But instead of going back to the market in a year or less than a year, we are going to take the more traditional two or three years to invest it.'" According to Taylor, this restraint is, in the long term, good for the industry and shows good fiduciary responsibility.

The industry as a whole is still in good shape, he reported. "My own speculation is, if you look back at the last five years or so and airbrush out the years 1999 and 2000 as having numbers fueled by adrenaline," he said, "you will see a very nice upturn and healthy growth in the long term."

— Hilah Geer

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