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Venture Capitalists see Major Investing Changes

At the recent AO Venture Summit,Silicon Valleyinvestors cautioned about changes to traditional investment funding models as the semiconductor market enters a cyclical downturn.

At the 2012 World Economic Forum held atDavos,Switzerland, financial leaders from around the world worry about the future of capitalism. As wealth disparity and the thread of a global recession stalks the planet, few would argue that fundamental financial changes are taking place.

One bright spot in the economic gloom is the semiconductor industry, which has experienced strong growth in recent years. But this is an industry prone to cycles that are tied closely to enterprise and consumer consumption, were the former seeks production efficiencies while the latter seeks social connectivity.

Reports suggest that this bright spot will dim slightly as the semiconductor industry enters a down cycle.  Earlier this month, speakers at the SEMI Industry Strategy Symposium (ISS) trade show predicted a chip downturn in 2013. Global foundry giant TSMC pegs the slowdown closer to 2012.

How will these changes affect the flow of investment dollars into Silicon Valley, the center of innovation for the semiconductor market? A recent panel at the AlwaysOn Venture Summit suggests that fundamental changes to the investment funding model may have a greater affect than the ongoing global financial crisis.

Venture Capital Business Outlook 2012 panel at AO Venture Summit.

What follows is a portion of a panel on the venture capital business outlook for 2012.  The host was Packy Kelly, Partner and Co-Head, US Venture Capital Practice at KPMG. Panelists included Ann Winblad, Co-founder & Managing Director at Hummer Winblad; Rob Chaplinsky, Managing Director at Bridgescale; and Paul Matteucci, General Partner at USVP.

The moderator, Packy Kelly from KPMG, started the discussion by observing that the 2011 venture capital industry was disrupted by over-funding in both the Angel and Late-Stage venture investment rounds. Lower amounts were being raised by VC firms than were being invested. He asked the panelist for their thoughts on the shape of the competitive landscape for venture capital investing in 2012.

First to answer was Ann Winblad from Hummer Winblad. She began by stating that her clients were unlimited investors that were used to longer investment cycles. To date, most venture funds try to get completed in a 10 year cycle, with a company going public after 6 years. Today things are different. She wondered if unlimited partners had the endurance to go for a longer investment cycle.

There have been many expansions and contracts of this cycle over the years. “The expansion in the 1990’s was as scary as the contractions,” said Winblad. Still, the asset class is performing well. Today, most companies don’t have an IPO exit strategy. Instead, they are looking for acquisitions. Winbald explained that she had 6 companies acquired in last year – something that hadn’t’ been anticipated. But it was good news for the venture industry. Business as usual is now over a longer period of time.

Next to comment was Paul Matteucci from USVP. He agreed that the investment cycle was taking much longer times to equity, which meant that patience and staying power are critical. Since his focus was IT, he was excited about the growth of device location technology over next 5 years. “Lots of investment will be driven by these trends, including in the medical market,” explained Matteucci.

Another growth market for location technology would be agriculture. The problem with that market was knowing when to start. You don’t want to start too soon or you’ll lose, said Matteucci, adding that the agriculture market looks like the IT industry in the 1970s.

Finishing this first round of questions was Rob Chaplinsky from Bridgescale. He felt that the current trend of investment money pouring into deals but not funds was unsustainable. A new type of venture capital approach was needed, perhaps with a greater emphasis on startup incubators. “Now, I’m not so skeptical on incubators,” said Chaplinsky. His firm had 40 companies working as incubators, most doing software programming. The average age in the incubator coders was 23-24 year olds. These people are fearless and full of energy, believing they were geniuses and with little patience for non-programmers, he observed. The challenge for VCs with these types was to develop trust early on.

On the business side of things, Chaplinsky felt that his clients see greater risk in Series A and B stages of investment. Most of them want later stage deals, further into actual product deployment. This was one sign that the VC market is going through massive changes.

 

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