THE STATE OF VENTURE CAPITAL: THE ROAD TO RECOVERY
by Roman Kikta
Mon, Oct 17, 2005, 10:15 PM
By Roman Kikta, Managing Partner, Genesis Campus
(Editor's Note: The following article, written by Roman Kikta, is based on his presentation to 30 executives at the MTBC CEO Forum on April 29 at Ericsson. The CEO Forum Series, sponsored by Stanton Chase, is an invitation-only program specifically designed for the CEO or president of a technology company to provide them with the opportunity to meet with their peers for a roundtable discussion of ideas and issues. The theme of the 2005 CEO Forum Series is "Re-Building The Technology Economy In North Texas.” Kikta is the managing partner of Genesis Campus, an early stage venture capital fund, and a past speaker at the 3rd Friday Technical Luncheon. )
The impact of venture capital on the U.S. economy is colossal -- it has been estimated that “venture capitalists have created nearly one-third of the total market value of all public companies in the United States” according to the National Venture Capital Association (NVCA). Venture-backed companies between 1970 and 2003 employed more than 10 million American workers and generated almost $2 trillion in revenue in 2003; this represents approximately 9.4 percent of total U.S. jobs and revenues.
More than $100 billion was invested in the tech-fueled bubble at its pinnacle in 2000. Since then, the venture capital industry has plunged back to Earth after the tech bubble burst to a more stabilized annual range of $15 billion to $20 billion. With an improving economy and a refocus on fundamentals for investment opportunities, VCs are at least for now on the road to recovery, while the aftermath of the tech party still lingers for some like a bad hangover.
Venture capital investors from Boston, through to the DFW Metroplex, to Silicon Valley invested a total of $20.9 billion into 2,876 deals in 2004 according to Thomson Venture Economics/ National Venture Capital Association. This marks a reversal from a three-year downward trend and was an increase from $18.9 billion invested (and 249 more deals than) in 2003. The increase in 2004 was largely attributable to late-stage investments jumping to $7.2 billion in 2004 compared to $4.9 billion in 2003. Additionally, the first quarter of 2005 marked the 12th consecutive quarter of venture investing in the $4 billion to $6 billion range. Furthermore we are seeing signs of competition among some of the top firms for deals.
Investments in the life sciences sector (biotechnology and medical devices industries, together) increased during 2004, totaling $5.6 billion in 578 companies, the largest dollars and deals in four years. The software industry hit a three-year high during 2004, attracting $5.1 billion. Software represented 24 percent of all venture capital dollars while pure telecommunications investing fell to $1.9 billion in 2004, the lowest figure in eight years. The networking industry fell slightly to $1.6 billion, a seven-year low. Semiconductor investing continued its steady, if modest, recovery rising to a three-year high of $1.6 billion in 2004. Most other major industry categories were comparable to prior year levels.
Of the top regions garnering the largest amounts of venture capital in 2004, more than half experienced an increase in investing over the prior year. Silicon Valley captured $7.1 billion, up 13 percent over the prior year. New England secured $3.1 billion, climbing 6.6 percent from 2003, while Texas has just over $1.09 billion invested, which was a slight decline from the $1.16 billion invested in 2003. According to Ernst & Young/VentureOne, the Dallas-Fort Worth Metroplex had in 2004, a total of 30 deals for $320 million invested. Already in the first quarter 2005, $91 million has been invested in 10 companies.
The industry is witnessing the development of frenzied fundraising activity for venture capital commitments although the road ahead remains uncertain for many of these, especially those not in the top ranks in terms of investment track record. Since the beginning of this year, there have been more than 290 firms on the fundraising trail, as compared to 170 funds raising $17.6 billion in 2004.
“The successful raising of capital (from limited partners) is only a quarter of the journey for a VC firm … we still have to identify high-potential opportunities, invest and successfully exit,” according to Michael J. Buckland, partner at Dallas-based Mobility Ventures. “Furthermore, technology today is global in nature and to remain relevant, venture capitalists must have a global perspective and presence, especially in Europe, China and India, augmented by solid domain expertise and operational experiences.”
The venture community is retreating to the basics, toward a realism that centers on entrepreneurs building substantial and sustainable businesses which may take several years to develop prior to going public or being acquired, rather than two or three years, which was the expectation during the tech-boom. Investors now want a company to be well on its way to $100 million in annual revenue before it goes public.
While institutional investors have a keen interest in top performing firms, there is a limit to how much money can be put to work. Following the tech plunge, new quality deals dried up, forcing venture firms to return billions (release on capital commitment obligations) in un-invested capital. According to VentureOne, venture firms have an estimated $60+ billion in capital “overhang” that has not been invested. Today, the top tier firms are raising new funds of $250 million to $500 million, half the size of those raised during the tech frenzy, when billion-dollar funds were commonplace. Nevertheless, industry veterans contend that there are still too many venture dollars chasing too few worthwhile deals.
“Many of the Telecom Corridor's emerging companies now find their best customers in Asia and specifically in China, where U.S. technology products are in high demand,” states Ed Cantwell, CEO of Richardson-based InnerWireless, a leader in building wireless systems, who has recently landed a major contract in China with a leading Beijing facility.
While the opportunities that are developing in Asia, notably China and India, are markedly different from the opportunities in the United States, they have not been places to find leading-edge opportunities in technologies. The tide is turning.
Wu-Fu Chen, a leading entrepreneur and venture capitalist and a founder of Genesis Campus, claims that “the free flow of ideas and capital have created entrepreneurial hot spots around the globe, specifically in Asia, challenging venture firms to follow or risk being left behind.” Adhering to his own advice, Chen foresaw the globalization of venture opportunities four years ago and sponsored a new, independent venture fund and incubator called Acorn Campus-Shanghai to invest in China-grown opportunities.
As the venture-capital turnaround that took root in 2004 continues, VCs are valuing entrepreneurial skills, industry knowledge and operational experience first and foremost. While investing in “telecom” has become a dirty word in many a VC's vocabulary, some seem to forget that telecommunications are the backbone of a connected society having an effect across many industries.
Telecom makes possible the internet and with technologies and applications including wireless and broadband, has and continues to redefine how we live, work and play. It provides us with convenient any time, any place personalized connectivity. For example, today's ultra-fast access to your own office network, permanent video-links between different teleworkers, virtual teams, virtual offices and virtual organizations - at almost zero cost, using existing phone lines, computers, and wireless devices or instant access to thousands of Web TV stations, all offering video on demand, virtually any feature film can be downloaded and watched at the touch of a button.
The Telecom Corridor® area seems to be well positioned as a center of technological innovation. While it offers the single largest concentration of the world's leading high-tech and telecommunications companies, including Nortel, Texas Instruments, Samsung and Alcatel, it also has its share of seasoned entrepreneurs that are coupled with a highly skilled labor force in such areas as wireless, nanotechnology, energy, technology, and mobile applications including content, entertainment and security. Without question, the companies of the Telecom Corridor® area are contributing to the United States' edge in innovation and technology development.