作者：安普若 在 海归黄埔军校 发贴, 来自【海归网】 http://www.haiguinet.com
An Overview of the Venture Capital Industry & Emerging Changes
Steven P. Galante
Editor & Publisher
The Private Equity Analyst, newsletter
Wellesley, MA
Brief History
Entrepreneurial finance has a lengthy history in the U.S., going back at least to the financing of the railroads and textile mills in the 1800s. The modern venture capital industry began taking shape, however, in the post-World War II years.
It's often said that people decide to become entrepreneurs because they see role models in other people who have become successful at entrepreneurship. Much the same thing can be said about venture capitalists. The earliest members of the organized venture capital industry had several role models, including these three:
American Research & Development Corp., formed in 1946, whose biggest success was Digital Equipment Corp. The founder of ARD was Gen. Georges Doriot, a French-born military man who is generally considered "the father of venture capital." In the 1950s, he taught at Harvard Business School. His lectures on the importance of risk capital were considered quirky by the rest of the faculty, who concentrated on conventional corporate management.
J.H. Whitney & Co., also formed in 1946, one of whose early hits was Minute Maid orange juice. Jock Whitney is considered one of the industry's founders.
The Rockefeller family －－ and, in particular, Laurence S. Rockefeller －－ one of whose earliest investments was in Eastern Airlines, which is now defunct but was one of the earliest commercial airlines.
The Second World War produced an abundance of technological innovation, primarily with military applications. They include, for example, some of the earliest work on microcircuitry. Indeed, J.H. Whitney's investment in Minute Maid was intended to commercialise an orange juice concentrate that had been developed to provide nourishment for troops in the field.
Creation of the SBIC Industry
In the rnid-l950a, the federal government wanted to speed the development of advanced technologies. This was partly in response to Cold War fears about the growing technical prowess of the Soviet Union. In 1957, the Federal Reserve System conducted a study flat concluded that a shortage of entrepreneurial financing was a chief obstacle to the development of what it called "enterprising businesses." To correct this, Congress passed, and President Dwight Eisenhower signed, the Small Business Act of 1958.
The legislation created the Small Business Investment Company program within the U.S. Small Business Administration. The legislation allowed SBA-licensed SBICs to "leverage" their private capital up to three-to-one (and, starting in 1976, up to four-to-one) by borrowing from the federal government at below-market interest rates. To make sure the program got off to a fast start, Congress allowed commercial banks to form SBICs. The legislation exempted bank-owned SBICs from the Bank Voiding Company Act, which prohibits banks from owning businesses unrelated to banig. And that's Snowbanks got into this business. Within four years of the legislation, nearly 600 SBICs were in operation.
At around the same time, a number of venture capital firrns were forming private partnerships, outside the SBIC format These partnerships added to the venture capitalist's tool kit, by o-ffeaiNg a degree of flexibility that SBICs ladc. For instance, private funds are not subject to limitations on the sizes of portfolio companies, as SBICs are. Within a decade, private venture capital partnerships passed SBICs in total capital under management.
Growth in the 1960s
The 1960s saw a bull lPO market that allowed venture capital firrns to demonstrate their ability to create companies and produce huge investment returns. For example, when Digital Equipment went public in 1968, it provided ARD with a 101% annualized ROI. The $70,000 Digital invested to start the company in 1959 had a market value at IPO of $37 million.
As a result, venture capital became a hot market, particularly for wealthy individuals and families. It was still considered too risky for institutional investors, however.
Contraction in the 1970s
In the 1970s, though, venture capital suffered a double-whammy. First, after a red-hot IPO market brought over 1,000 venture-backed companies to market in 1968, the public markets went into a seven-year slump. There were a lot of disappointed stock market investors, and a lot of disappointed venture capital investors, too.
Then, in 1974, Congress dealt a severe, though unintentional blow to the venture industry. in response to abuses of corporate pension funds (abuses that were unrelated to the venture industry), Congress passed ERISA －－ the Employee Retirement Income Security Act. ERISA was intended to protect corporate retirees by curtailing the abuse of pension fund moneys. However, pension fund managers responded by halting their participation in all forms of high-risk investing.
As a result of the poor public market and ERISA legislation, venture capital fund raising hit bottom in 1975. In that year, the entire industry raised a grand total of $ 10 million for new investment.
Recovery in the 1980s
Well, things could only get better from there. Beginning in 1978, a series of legislative and regulatory changes gradually improved the climate for venture investing. First, Congress slashed the capital-gains tax rate to 28% from 49.5%. Then, the Labor Department issued a "clarification" that eliminated ERISA as an obstacle to venture investing. These and other changes in government policies removed impediments to risk-equity investing.
At around the same time, there were a number of high-profile IPOs by venture-backed companies. These included Federal Express Corp. in 1978, and Apple Computer Corp. and Genentech, Inc. in 1981. This rekindled interest in venture capital on the part of wealthy families and institutional investors.
Indeed, in the 1980s, the venture capital industry began its greatest period of growth. In 1980, venture firms raised －－ and invested －－ less than $600 million. That number soared to nearly $4 billion by 1987. (Please see figures 1, 2 & 3, which are attached.)
The decade also marked the explosion in the buy-out business which, depending on the form of religion you practice, either is an intrinsic part of the venture capital industry, or is completely antithetical to it. From my own point of view, I believe the two are inseparable. Certainly, the two are closely linked in the minds of the most important constituency in this business －－ the managers of the endowment, pension and other institutional funds that provide the partnership capital that Gels both venture and buy-out investment.
Growth of Institutional Funding
Such institutions emerged in the 1980s as the primary source of capital for private equity partnerships. In 1978, wealthy individuals and families were the largest single source of capital, accounting for aboout a third of all funding. Since then, individuals and families have come to account for about 10% of funding. Public and corporate pension funds have become the most important source of funding by far, accounting for about half of all commitments. (Please see figure 4, which is attached.)
The surge in capital in the 1980s had predictable results. Returns on venture capital investments plunged. Many investors went into the funds anticipating returns of 30% or higher. That was probably an unrealistic expectation to begin with. The consensus today is that private equity investments generally should give the investor an internal rate of return something on the order of 15% to 25%, depending on the degree of risk the partnership is taking. However, by 1990, the average long-term return on venture capital funds fell below 8%.
That led to yet another downturn in venture funding. Disappointed families and institutions withdrew from venture investing in droves in the 1989-91 period. Commitments to venture capital funds plunged to $1.4 billion in 1991.
Commitments to buy-out funds and most other categories of private equity also ｄｒｏｐped sharply. It became clear that a large number of the buy-outs organised in the late 1980s had been priced too high and financed with insupportable levels of debt. This was especially so after the U.S. entered a recession in 1990. Significantly, bankruptcy funds were the only kinds of private equity funds that raised more capital in 1991 and '92.
The economic recovery and the IPO boom of 1991-94 have gone a long way toward reversing the trend in both private equity investment performance and partnership commitments. Largely because of the IPO boom, venture capital returns currently are running at around 12% annually. That's still behind the roughly 16% return that investors in buy-out funds have received. And, of course, considering the differential in risk between the two categories, venture investments clearly should be earning a higher return. Still, the returns are looking more respectable. So, funding once again in on the rise.
Current Trends in the Market
That just about brings us to today. The most significant current trends －－ aside from the portfolio-company investments, which David Gleba will discuss －－ I think are these:
Trend One: Capital Is Pouring Into Private Equity Funds
Commitments to private equity funds of all kinds hit a record of approximately $21 billion Venture capital funds raised a record $4.5 billion. Buy-out and other kinds of corporate finance funds raised a record $14 billion. There are three reasons why this is happening:
I've already mentioned one: the impact on investment returns of the IPO boom. This has renewed the credibility of venture and other kinds of private equity funds as a reliable source of exceptional returns
Second, institutional investors today are on an avid search for high-yielding investments. They and their advisors have come to the conclusion that public equities won't perform as well in the second half of this decade as they have for the past decade. Since 1991, the SOP 500 Index has appreciated at an annual rate of about 14%. That compares with a 60-year average of about 10.5%. Investors have concluded that the return on public equities will regress to the historical mean, which means that they would have to be less than 10.5% for the next few years
I suppose that's debatable, but that's besides the point. The fact is, pension funds, endowments and other institutions believe that will be the case. And they have annual return targets that they must achieve on their investments in order to meet their obligations to retirees, the universities they support, etc. So, they have increased their allocations to alternative investments －－ primarily venture capital funds, buy-out funds and other kinds of private equity funds.
The third factor behind the surge in capital commitments is a trend among venture firms to raise bigger and bigger funds. Behind that trend are several factors. First, the most-established venture firms have more partners and therefore are able to put more money to work effectively. Second, venture firms are doing less deal syndication, which enables them to put more money to work in a single deal. And third, many traditionally early-stage venture firms have shifted to a "multi-stage" investment approach. They will back companies in technologies and industries they know intimately, almost regardless of the stage. Obviously, they're able to put large amounts of money to work in later-stage investments.
Trend Two: First-Time Funds Are Back in Favor
During the 1989-91 downturn, it was nearly impossible for a new venture capital firm to raise partnership capital. Just as there was a "flight to quality" in the public equity market, there was a "flight to quality" among investors participating in the private equity market. Today, that flight has reversed. There are three seasons why first-time Ends are finding it easier:
- Breakups of some of the most well-established venture firms have shocked investors into recognising that if they invest only with established firms, they will have a smaller and smaller universe of And managers to chose from as time goes by. Burr, Egan, Deleage & Co., Merrill Pickard Anderson & Eyre and Technology Venture Investors are only some of the firms －－ albeit probably the best known －－ that have announced plans to break up in the past year or so. Breakups such as these also have demonstrated that investing with an established firm is no more a"sure bet" than an investment in a first-time . As a result, investors are now looking for the "blue-chip firms of tomorrow."
- The overhaul of the Small Business Investment Company program in 1992 has given new firms an excellent mechanism for attracting enough investor attention to get started. The funds generally are small. However, augmented with SBA leverage, they provide new venture managers with sufficient capital to build a track record. Later, if they are success, they can take that track record to institutional investors to raise a conventional .
- Many states are sponsoring the formation of new venture capital firms to spur the creation and growth of new businesses. California, Florida, Maryland, Massachusetts, Michigan, New York, Oklahoma and Texas are among the states creating such programs. They are fairly controversial efforts, because they run the risk of sacrificing return for economic stimulus. Personally, I don't think they're a good idea. However, some of them are better designed than others, and a few might actually work.
Trend Three: Venture Firms Are Being Run More Like Businesses
One of the healthiest consequences of the growth in institutional Ending has been the increase in scrutiny that venture firms have come under. I realize that many venture capital managers might disagree with that assessment, and I can understand why. No one, least of all a fiercely entrepreneurial financier, wants to have a public pension And employee or, worse yet, the hireling of a such an employee －－ a "gatekeeper" - looking over their shoulder. However, I think the watchfulness of investors and advisors, and the feedback and suggestions the better ones provide, are helping to increase the sense of professionalism and discipline in the industry.
Some of the things they require, such as better record keeping, are simply sound business practice. Others, while perhaps annoying to have to do, are important for maintaining discipline and focus. I'm thinking here of the need to elucidate and pursue a clear and consistent investment strategy, and to explain to investors in great detail any departure from that strategy.
Perhaps the most important contribution to better management that investors and their advisors has made, however, has been to force founding partners to concentrate on compensation issues and succession planning. These issues, just as much as investment success, are the ones that will ensure the longevity of the firm.
Conclusion
Looking at the history of the venture capital business, you can draw a number of conclusions about what to be prepared for in the future.
First, I think it's fairly obvious that the venture business is a boom-and-bust business. When things are good, they are very, very good. When the chips turn down for the industry, things gets pretty severe. If you invest in venture funds or manage venture funds, you need to be aware of this acute volatility and not let it sway your convictions about either the risks and or the rewards of the business.
Second, it's very clear from the history that government policy has an extraordinarily strong effect on the health of the venture capital business. I've mentioned the strong impact －－ both good and bad －－ of the ERISA, capital gains and SBIC legislation. I could also have mentioned a host of other government regulatory bodies that have a significant influence on the business. These include the Food & Drug Administration, the Securities Exchange Commission, the Federal Reserve System through its influence on banks and their venture capital subsidiaries, the Environmental Protection Agency, and many others. As an industry participant, you need to be aware constantly of pending changes that could affect the outcome of your investment decisions. If you have an inclination toward leadership, you might also consider working with NASBIC and NVCA to ensure that legislative and regulatory changes work to the industry's benefit.
Third, the industry's history －－ short as it is －－ demonstrates clearly that the quality and dedication of the people in the industry make the difference between success and failure. This is true whether we're talking about entrepreneurs, venture capital fund managers, limited partners, or the accountants, attorneys and other professionals who service this business. You have the opportunity to strengthen this industry by applying the same degree of creativity, determination, and ethical practice to the business that your predecessors have done before you.
https://www.vcinstitute.org/materials/galante.html
作者：安普若 在 海归黄埔军校 发贴, 来自【海归网】 http://www.haiguinet.com
