With apologies to Mel Brooks:
Springtime for venture and IPOs
Winter for cram-downs and RIFs
We're investing at a faster run
Lookout, here comes the billion-dollar fund!
During this Nuclear Winter for venture, many of the megafunds said they were going back to basics and downsizing their funds. Now the billion-dollar fund is back. NEA just closed $1.1B Other venture firms have been raising their first new funds since 2000, albeit still smaller than the bubble funds, and often with fewer general partners. Kleiner Perkins for example is finishing up a $500M fund (or a$400M fund, accounts differ), albeit with some confusion about general partner roles, perhaps befitting the Bubble Echo psychology, since they appear to have raised the capital despite some of their premier partners taking a reduced role in the new fund. Nevertheless, a massive turnaround from 2002, when the VC industry gave back over $5B of capital. Is this renewed venture optimism a bullish sign? Perhaps smart money truly believes the bull is back?
While the venture industry include some of the most prescient investors anywhere, their primary 'customer' are the pension managers, who are allowed by ERISA to invest up to 5% in alternative investments, including venture capital and buyout funds. These fund managers are more cautious and longer-term focused than most fund managers, and their investments in venture funds tend to be a lagging indicator.
Typically fund raising trails the public markets by about a year. The current venture fund bubblet is driven by wave 2 in the equity markets. The 5% alternative allocation of pension funds has risen with the market, and the fund managers are looking to place their allocation. Given the re-opening of the venture IPO window, allocations to venture make sense again. Hence the time is right to raise venture capital.
How long this lasts depends on how well the equity markets perform. Yelnick's view is that this venture optimism is not misplaced, even if the Big One hits this year and continues into 2005. In 1980 the venture business was doing very well, as markets were rising during the upcycle of the four-year Presidential cycle. Just before the election, the economy faltered, and the electorate quite properly threw out Jimmy Carter for Ronald Reagan. In 1981, the new President dosed out the medicine needed to end the inflationary '70s and set the stage for the so-called Decade of Greed. The recovering economy promptly sunk into a double-dip recession, markets fell and the IPO window closed. Venture firms kept investing, however, and were rewarded in 1983 with a re-opening of the IPO window and a PC bubble comparable (at much smaller scale) to the dot-com bubble of 1999. Yelnick was involved with the venture business during this period.
We may be headed in a similar direction. Risk of a double-dip recession has increased. The EWFF reports that the consumer confidence poll of University of Michigan has dropped suddenly by 10%. Previous drops in a different poll by ABC/Money (which I guess is not yet out) of 7% or more have signalled that a recession was soon to follow. The venture industry has learned how to weather the first wave down, and should be able to work through this second wave, particularly if it is relatively swift. Valuations will remain attractive, and the rise off the real bear market bottom should be quite stunning.