Ten 2008 Predictions from the VC Cheap Seats…
This will be a big year for us in the exponential economy—will we have a recession? Will oil stay above $100 a barrel? Republican or Democrat? Patriots, Celtics, and Red Sox all in one year? While all of these issues are of the utmost importance, I offer up a set of predictions about issues that will have a big impact on our local economy. Here we go…
1. Investor Liquidity Will Continue to Improve: Last year 86 venture-backed companies were taken public, raising $10.3 billion. This compares very favorably to 2006 (57 companies and $5.1 billion, respectively). There were approximately $40 billion worth of venture-backed company M&A transactions last year. Notwithstanding the credit crisis and the volatility in the public capital markets there continues to be attractive growth exhibited by venture-backed firms; this augers well for continued liquidity. And we need this liquidity to make the VC model work.
2. There Will Not be “Too Much” Venture Capital: In 2007, the global venture capital industry raised nearly $40 billion (approximately $25 billion of which was in the U.S.). This was up from $37 billion in 2006. The amount of money raised by venture funds was roughly equal to the amount of VC money invested; the system seems to be in balance. And if there was too much money in the system, why is it still so hard for entrepreneurs to raise capital?
3. But We Will Continue to Face a Shortage of Good Deals: There are 750 active venture funds in the US, 100 of which are in New England. Every venture capitalist is looking for the next big thing—and we all copy each other. Within months, every great idea that gets funded is faced with a handful of copy-cat companies. This has the unfortunate consequence that all hot categories quickly become over-funded, which ultimately drives down investor returns. It is really hard to find a great deal—they are most likely way off the beaten track.
4. More Billion-Dollar Venture Funds Will Be Raised: Counter to the protestations of many venture capitalists who complain that the venture capital model just does not work for billion-dollar funds, many senior VC partners will continue to raise large funds because the fees are just too attractive to pass up. On the margin, however, those funds will tend to over-invest in later Series B and C rounds, which will further depress overall VC returns—because start-up investing (Series A) consistently shows better returns than mid-stage or late-stage VC investing. Yes, the attractive returns will continue to be in the early-stage marketplace.
5. The VC Shake-out Will Continue: With more modest returns in 2008, we should see further rationalization of the venture capital industry. The New England Venture Capital Association has nearly 100 member firms although arguably only a fraction of those firms are considered active. (As President of the NEVCA my sense is that two-thirds of the member firms have made more than one investment this past year.) As high as the barriers to entry are to the VC industry, the barriers to exit are equally as high. Keep in mind that limited partners are often committed to VC funds for between 5 and 10 years. But given all the new firms created earlier this decade, many will struggle to raise successor funds in 2008 and will simply cease to be active investors.
6. Some Cleantech Companies Will Crash Land: 2008 will be a year that we really begin to see the challenges of building successful cleantech companies. No space has been hotter over the last few years. The first nine months of 2007 witnessed $2.9 billion invested in this category, which frankly did not exist in any meaningful way earlier this decade. Some investors will learn painfully that questions such as “Does the technology actually work?”, “Who is the customer?”, and “What is the business model?” are not trivial issues after all.
7. Yes, There Will Actually be Some Bad Deals in China: And I do not say that lightly, as I grew up in Hong Kong (and love that part of the world) and IDG Ventures (where I happen to work) is a leading investor in China. But, quite simply, too much capital has been invested there by foreigners who either do not have the appropriate local infrastructure to manage those investments or have been caught up in the Middle Kingdom euphoria. There will be an absorption issue—can the local economy productively deploy that much capital? Will there be a post-Olympics shake-out? Undeniably there will be, although China will be an important and attractive market over the longer term (as measured in decades). Fittingly, last year was the Year of the Pig, and 2008 is the Year of the Rat.
8. The Convergence of IT and Life Sciences Will Continue to be Important: Notwithstanding the rhetoric around the possible misuse of genetic data, powerful innovations will occur at the intersection of IT and life science technologies. Novel intelligent medical devices will continue to be developed. Advances in engineering, fabrication, energy, material sciences, and computing power will continue to converge to create products that will improve patient care and enhance quality of life. And New England is in a wonderful position to exploit this convergence.
9. The Social Networking Phenomenon Will Get New Legs: As evidenced by Microsoft’s investment in FaceBook, or Google’s new OpenSocial platform, social networking will continue to become more mainstream and will pervade the enterprise. As these platforms become more open to third-party developers, and the cost of starting Web 2.0/3.0 companies continues to drop, many creative entrepreneurs will develop products to monetize this phenomenon.
10. We Will Enjoy Continued Strength in the Local Innovation Economy: Over time, outsized rewards are realized by those who innovate. This year should be a productive one and will set us up for a great decade ahead. And besides, it is not like I could play for the New York Giants—although they may be looking for a new quarterback at some point in 2008.