NYTimes article on Early Stage VC Investing, post PWC and NVCA analysis

See my secondary comments below... It shows how even good sources such as NYTimes can get effected by bad analysis from original sources :-(

NY Times had an interesting article on VCs and early stage financing.
http://bits.blogs.nytimes.com/2008/07/19/venture-funding-drops-for-youngest-companies-as-older-ones-suck-up-more-cash/index.html

The average exit for VC's and companies has increased from 2 years, pre 2000, to 6.5-7 years today. Given the compounding effect, that has a major effect on the returns of VCs' investments. The interest in later stage financing is a small and belated effect that may turn into a trend.
Risk has not changed. If anything in the current market environment it has gotten worse. The returns, however, have diminished. That makes it natural for the VC's to move into the lower risk later stage companies. This reduces their risks (and yes the returns -- some), but also diminishes the time to exit.
The solution is trivial; simply improve the returns on investment. Make IPO's easier by removing some of the SOX requirements for smaller companies. That will have an immediate impact of VC capital moving to China (as evidenced by their lack fo interest India which has a very stringent IPO environment -- not to mention lower multiples).

This is a good time too. BOTH presidential candidates want to have something to talk about when it comes to the economy. The IBs are looking for free money they generate from IPOs.
Esfandiar

Post Statements: I looked at an article that has the graphs for PWC and NVCA.
http://www.techcrunch.com/2008/07/19/vc-deals-in-charts-q2-2008%e2%80%94exits-we-dont-need-no-stinkin-exits/

If anything the early stage investing is getting back to normal after a major rise in the 4th quarter of 2007. Look for instance at Q1-07 total investment of $8.7B vs $1.6B in early stage. Today it is $7.5B with $1.6B going to early stage.

Sorry to say that in my humble opinion this article is a regurgitation of bad analysis. I am only
hoping NYTimes would publish my post comments.

Good VCs balance their portfolio properly for risk, return and temporal effects on returns. Look at the percentage of profits made by the top 5 vs the rest of the VC community. The top and middle tier firms have raised even more funds in the past quarter. Also lets not forget that their pay structure is that they make more money on exits; so they have an incentive to invest.

-- Esfandiar Bandari, PhD, MBA