Five Popular Predictions for 2011 That Are Wrong

1/3/11Follow @greels1

1. Prediction in Vogue: 2011 will be the year of the “Super Angel”

Reality: Given all the angel investment activity, and the fact that it has never been easier to start a new company (low cost of computer power, plenty of talented people, plenty of real estate, etc), too many “me too” companies will be started, leading to too many companies dividing up small and emerging markets. And because angels do not typically have the ability due to their size to support numerous companies over many rounds, many angels will experience an unacceptably high loss ratio. This will cause many of them to dramatically slow down their new investment pace so that they can support their more promising companies.

2. Prediction in Vogue: China is the center of the VC-world

Reality: While the growth rates and level of investment activity in China are very seductive, the recent dramatic IPO activity harkens back to NASDAQ 1999 and will in hindsight be considered the high water mark for VC activity in China. Notwithstanding all the euphoria in China and its robust IPO market, the broader index of leading Chinese public companies is up only 3.3% year-to-date. The dramatic capital inflows—which have masked many structural issues in the Chinese economy—will lead to increasing rates of inflation and other social dislocations. Given the poor operating and financial conditions of many Chinese enterprises, banks will find it difficult to raise interest rates to contain inflation, which will lead to an unexpected and dramatic reduction in lending activity.

3. Prediction in Vogue: Twitter is worth much more than $4 billion

Reality: Ultimately all companies must create economic value that earns a return acceptable to the underlying invested capital. It is one thing to “build an audience,” but ultimately investors will demand that all of these social media properties generate a cash-on-cash return to invested capital. The fear is that Twitter will prove itself to simply be a micro-broadcast network; this realization will send shudders throughout the social media world and will undermine all the hyper-valuations we are seeing today in this sector. And what percent of tweets are actually read anyway?”

4. Prediction in Vogue: The VC industry has weathered the worst of it and is poised for recovery

Reality: While the VC industry has certainly suffered mightily, it is still not clear the worst is behind it. Starting in early 2008—and probably lasting through 2011—we will have witnessed an industry being cut more than in half. In 2008, VC’s raised nearly $28 billion; in 2010 the figure may only be $12 billion. There are nearly 500 VC firms listed as members of the National Venture Capital Association (where I am a board member); arguably less than 20% of those firms can predictably and reliably raise new funds in this environment.

5. Prediction in Vogue: With the general economic recovery, the pace of new VC investments will significantly increase

Reality: While the absolute number of new companies funded may increase given the prominence of “Super Angels,” marginal VC firms—many of whom are late in their current fund’s investment phase—will be reluctant to make new commitments. This will be exacerbated by the need to unexpectedly put more capital into existing portfolio companies, stressing capital reserve assumptions. Q3 2010 saw $4.8 billion of new investment commitments, which was meaningfully more than the $3 billion raised by VC firms in that same quarter; as the industry invests this “capital overhang,” new investment pace will moderate unexpectedly quickly.

Michael Greeley’s blog, On the Flying Bridge, can be found at www.ontheflyingbridge.com.

[Editor's Note: This is part of a series of posts from Xconomists and other technology and life sciences leaders from around the U.S. who are weighing in with the top surprises they've seen in their respective fields in the past year, or the major things to watch for in 2011.]

Michael Greeley is a General Partner at Foundation Medical Partners. Follow @greels1

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  • David L

    Re: Prediction #1–wouldn’t we expect a rational angel investor who is looking at a company in a crowded, nascent space to recognize that fact, and for valuations to adjust accordingly? And doesn’t that ultimately help bring returns into some semblance of equilibrium?