May 20 2011
by Todd Hixon

The More Things Stay The Same

… the more they will soon change.  This inversion of the famous saying applies very well to venture capital.  The VC business has long, strong cycles.  Everything goes in one direction for a few years, and the momentum seems inevitable, until it sharply reverses.

2011 is a time of extremes in VC.  The industry has earned a treasury-bond return for the past decade, and institutional investors are backing away, creating the lowest levels of capital commitment since the mid-90s. But, a bubble seems to be forming under social networking and flash commerce which is attracting a big wave of money and investor attention.

Brooks Zug of Harbourvest regularly gives on talk on the long cycle in venture capital.  At the NVCA annual meeting this year he put the period of the cycle at 17 years. The return chart below illustrates that: successive troughs for vintage years 1983 and 2000 (so watch out for 2017!).  He didn’t say what determines the period; my guess, however, is that it has to do with the time it takes a new generation to rise up and take control of VC firms and their institutional LPs.  Long cycles are hard to fully believe until you have lived through one or two.  And, there is the danger of being right too soon.  One savvy LP explained to me that he knows a party is going to end, but he would rather take the risk of bailing out a bit late than leave a lot too early and fall behind his peers.

Net Pooled IRR of US VC Industry by "Vintage" Year; Source: Cambridge Associates, Venture Economics

Likewise, the value creation by social networking companies today is impressive, e.g. LinkedIn’s $9 billion IPO last week.  But LinkedIn has been eight years in the making, and a ton of money is chasing a lot of angles on social networking and flash commerce now.  Odds are the returns here will diminish sharply, as they did for the ~50 disk drive companies funded in the 1980s (list: how many can you name now?) or the “” e-commerce clones of the ‘90s.

Venture capital is about entrepreneurs, innovation, and addressing big needs for customers.  The landmark wins over the years have been diverse:  DEC, Sun, Cisco, Apple, and Compaq; Oracle, Siebel, Lotus, Microsoft, Intuit, and Adobe; Intel, NVIDIA, and Xilinx; Yahoo, AOL, Amazon, and Google; recently energy companies like EnerNOC and A123; and many medical and bio-tech companies.

So I will predict the following:

  • Brooks Zug will be proven right (again):  VC returns will come back, and funds formed in the early years of the current decade will perform very well.
  • New investments in social networking and flash commerce will mostly go the way of Miniscribe and
  • Innovative businesses that create big value for customers will produce opportunities for great investments.  Fixing health care costs and making mobile commerce work are two areas that look good to me for the next few years at least.


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