World According to HBS…

A few days ago I attended a wide-ranging set of discussions for Harvard Business School graduates regarding the state of the VC industry. The discussions covered issues from international developments in Asia to how best to structure models of innovation to LP perspectives. I furiously made notes and thought I might share some of the highlights.

VC Developments Overseas:

A decade or so ago there was enormous excitement about VC investing in Asia. We watched with great anticipation as US VC’s “exported” our industry overseas, investing aggressively in business models which had exploded on the scene here and were now being launched in India and China. This naturally led to the creation of strong local VC franchises in those markets. Arguably these markets came of age very quickly which caused some of the participants to express some words of caution.

  • Many of the China investors felt that we are now in very uncertain times. The failure of a number of China IPO’s, the emerging waves of disclosure around fraud and accounting irregularities, and the every present trifecta of lack of property/human/intellectual property rights were underscored. True economic reform in China did not start until the late 1990’s – less than 15 years ago – when the banking system was reformed. Have expectations outrun realities?
  • There are now over 4,000 RMB investment funds in China.
  • “China is transitioning from a consumer of know-how to a producer of know-how.”
  • One the largest PE investors in the world shared that returns in China have been less than expected, and at best in line with other markets – that was quite sobering to hear.
  • Others observed that China is 17% of global GDP and “will become an asset class.”
  • India, on the other hand, has over 500 angel networks, a national stock exchange which has been vibrant for the last 20 years, and has a proliferation of national incubation funds.
  • Many of the India commentators were very complimentary of that country’s ability to aggregate numerous private sector initiatives, but worried that the bureaucrats making these allocation decisions were quite inexperienced.
  • Interestingly, the largest biometric database – until recently – was the FBI’s database, estimated to number 60 to 100 million people; India launched a national effort a few years ago and now has logged 250 million people  – going to 600 million people in 18 months! As someone who is fascinated about Big Data in the healthcare space, that holds extraordinary promise. It was also pointed out the North Korea has catalogued all 26 million of its citizens – probably little VC opportunity there!

Innovation Models:

There was an interesting discussion around models to drive innovation featuring NASA’s Tournament Lab program, which is a set of crowd sourced “contests” where the community at large is asked to solve problems NASA is grappling with (I wrote about NASA last year). This approach was juxtaposed with traditional approaches which include…

  • Internal Development: one defines the problem, finds the right internal workers, creates an incentive structure, monitors outcomes and then PRAYS for performance, which is opposed to…
  • Contest Model: one defines the problem, establishes evaluation criteria, sets the prize (often quite modest in the case of NASA), recruits problem solvers from the community and then PAYS for performance

Limited Partner Impressions:

The final set of discussions involved the LP’s – our customers. One of the largest state pension funds, which very publicly lowered its VC allocation targets in its portfolio model, observed that VC returns have “detracted from overall performance in all time periods” – that kind of stings! On the other hand, LP’s from leading academic endowments had the exact opposite conclusion and shared that “VC has been a great performer for the endowment.” So a couple of conclusions I left with…

  • As an LP, if you can get access to any manager you want, one can construct a fabulous portfolio of VC managers. Today, where access is not a meaningful issue, LP’s would be wise to lean into VC.
  • Large pension funds have hundreds of VC relationships, which by definition, will drive overall performance to be median – and median VC returns have been bad. Full stop.
  • There was a strong sense that there will be increased dispersion of returns from the median going forward, which for the last decade or so have been compressed.
  • Even though VC returns overall have been uninspiring that in no way is to suggest that there have not been some spectacular funds.
  • There are over 40 sovereign wealth funds which manage ~$4 trillion of capital; two-thirds of which were founded in last ten years. There is an expectation that they may be increasingly an active force in the VC industry.

Two other random observations:

  • Everyone was focused on the fact that the amount of capital to get to point of failure or point of acceleration in most VC-backed companies is now at an all time low, and this will further cause the VC industry to shrink as fund sizes will/can be smaller
  • The recently released Midas List (top 100 VC’s) has 33 people who went to a school in Boston – but only 3 on the list currently reside in Boston. That is a problem given how much of the nation’s VC dollars are managed in Boston – and we remain the second largest innovation economy behind Silicon Valley.
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2 Comments

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2 responses to “World According to HBS…

  1. Gabriel Susor

    Venture capital can be very profitable if you can handle all the pressure. -

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  2. Pingback: Healthcare Venture Capital Fundraising List 2012 Q4 | Jay Caplan on Medical Devices

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