the emperor's new cloth earley
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The Emperor’s New Clothes
The Role of VC in Financing Early Stage Technology Companies
30 May2011
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2Capital for Enterprise Limited
The Creation of New Technology Based Firms
• Theory– Idea– Research– Concept– Development of a product/service– Prototype– Marketing– Business development
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3Capital for Enterprise Limited
The Creation of New Technology Based Firms
THEORY
STAGE TYPE OF FINANCE SOURCE
Research Grants PUBLIC
Concept Proof of Concept PUBLIC/PRIVATE
Development of a product/service
Seed VC
Prototype Start Up VC
Marketing Early Stage VC
Business development Development Capital VC
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4Capital for Enterprise Limited
• Venture Capital IS Important
– “High growth, innovative companies are disproportionately important for economic growth in the UK. Venture Capital is an important source of finance for these companies..” (Nesta 2010)
– EVCA/CMBOR 2002• Some 95% of the companies replying to the survey stated that, without venture
capital investment, they could not have existed or would have developed more slowly
• Almost 60% said that the company would not exist today without the contribution of venture capital
• An average of 46 additional jobs were created by each responding company following the venture capital investment.
Hence Governments and Commentators Regard it Highly
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5Capital for Enterprise Limited
The Reality (?)
The Emperor’s New Clothes(with apologies to Hans Christian Anderson)
• Does VC deliver? Or does the promise keep us all enthralled and convinced?
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6Capital for Enterprise Limited
The industry today?
• Declining investment
• 2005 -09– Seed and start-up -50%– Early stage -30%– Later stage -18%
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7Capital for Enterprise Limited
The industry today?
• Declining funds raised
– Venture 50% reduction since 2006– But similar fall for small MBO and development
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8Capital for Enterprise Limited
The industry today?
• Why is fundraising difficult?
– Cycle?
– Or other (rational) reluctance from investors?
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9Capital for Enterprise Limited
The industry today?
• Why might investors be reluctant?
1. Proportionate over-allocation
2. Returns• UK Venture returns lower than private equity (LBO)• UK Venture returns volatile (IRR 21% to -7.6%)
3. Disenchantment with the model on offer
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10Capital for Enterprise Limited
The industry today?
• Quality and consistency of fund managers– Range of fund performance
– And no consistently top performers?• But probably consistent under-performers?
Vintage year
1997 1999 2000 2001
Top quartile
18.6% 3.6% 2.8% 0.2%
Bottom quartile
-8.6% -13.1% -18.6% -16.8%
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11Capital for Enterprise Limited
The Role for Government
• Because of Investor Reluctance and the Potential Economic Returns, there is a Case for Government Intervention – currently even at later stages
How (?)– Cornerstone Funds– Co-Invest– Tax Relief– Subordinate Investor– Leverage (Yozma, SBICs, ECFs)
But Industry Must not Become Reliant !
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12Capital for Enterprise Limited
The industry today?
• The (common) model– Hard to put money to work and illiquid– Timing
• 10 + 2 year funds– But average holding periods 7-8 years (+IRR impact)
– Economics• 2(+)% fees
– On commitments for 5 (?) years, not money-at-work
• Monitoring, Directors, arrangement fees– Damaging to investee companies?
• 20% carried interest– Disappearing rather than collapsing hurdles?
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13Capital for Enterprise Limited
The industry today?
– Transparency• UK data amongst the best in the world• But everybody is top quartile !• Too many great technology stories – not enough
great returns
– Scale• Small, inefficient funds Vs US model
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14Capital for Enterprise Limited
The industry today?
• BUT !
– UK has the conditions for a very successful industry
• Great science• Growing entrepreneurial culture• Technologists becoming investors• Experience and expertise in investing• The City• Transatlantic links
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15Capital for Enterprise Limited
Thank You