Wednesday 16 January 2013

Venture Capital-- Future Perfect? Future?

As we enter 2013, it is worthwhile to consider the state of venture capital. A succinct summary was contained in a piece by Peter Cohan, entitled "What's Ahead in 2013 for Venture Capital", which appeared on January 3, 2013, in here. I suppose that there are many of you who were nurtured, as I was, over a decade ago, to treat the venture capital world in almost mystical terms. But the ravages of the bubble in 2001, the virtual disappearance of the IPO market since 2005, and the Great Recession of 2008 have all left their mark.

As for the venture capital world, Cohan concluded as follows:
"Simply put, VC has been underperforming the average stock index since venture returns peaked in 1999. In the decade ending in 1999, the average VC generated a whopping internal rate of return of 83.4%. By 2010, the typical VC fund was a big money-loser, generating an internal rate of return of -5.2%. But by the mid-2012, the typical VC fund had recovered to generate a positive internal rate of return of 5.3%."
While at least pointing in the right direction, these kinds of returns hardly presage any return to the glory days of the 1990s. Moreover, the expectation for investments in 2013 is not evenly divided across sectors. Business and healthcare IT are seen as most likely to enjoy increased investment, while investment in medical devices, clean-tech and biopharmaceuticals are expected to crater. There is something disheartening in the apparent fact that these areas are being viewed with disfavour as a matter of return on investment. Moreover, given that all three of these areas are frequently accompanied by active patent filing programmes, any precipitous decline in investment may well have repercussions for patent practitioners with an oversized position in these areas.

The current state of start-up funding is also characterized by what seems to be an odd, if not corrosive, situation in how funding is taking place. As stated by Cohan, certain
"wealthy investors have been pouring seed capital into start-ups at the earliest stages of development without sufficient discipline. These investors expect only one in 10 of these companies to succeed. But the availability of the seed capital is driving up the salaries of top technical talent." 
 As a result, however, there is a tendency for less funding to be available for Series A funding (investments of between $5,000,000 to $10,000,000). This means, perhaps perversely, that unless the start-up can become cash-flow positive already at the seed capital stage, it will find it difficult to attract next-stage funding. Such a state of affairs, if widespread, will make it even more difficult for enterprises in medical devices, clean-tech and biopharmaceuticals to obtain the funds needed, especially given their more lengthy time-line for product development.

Voices are increasingly heard about how the current form of venture capital is broken (see, for instance, the report by the Kauffman Foundation-- “WE HAVE MET THE ENEMY… AND HE IS US” here). How the modest positive signs seen in 2012 will affect this discourse on the present and future of venture capital bears watching. At the more modest level, as an IP practitioner, these developments bear attention as they potentially affect the nature of IP practice.

1 comment:

Suleman said...

For the medical/biopharma areas small companies are going to have to adapt to 'going long', i.e. exits or collaborations with larger companies will happen later. So the model of building value quickly in the early years by filing many patent applications has to change to make it sustainable over a longer time period.