Why do VC people invest and what’s happening to the VC asset class itself? How have the VC and entrepreneurial marketplace changed? Srinivasan answered these and many other questions in his speech.
Venture capital (VC) firms invest capital in early-stage, high-potential, and growth companies to generate high returns by selling their shares during the company’s initial public offering (IPO) of stock in the company. Over the last 10 years, VC returns have been steadily declining. One reason for this decline is that “since 2000, there has been a dramatic decline in the [VC] exits themselves,” explains Srinivasan. Fewer than 50 companies went public each year between 2001 and 2008, compared to 180 per year between 1991 and 1998. Furthermore, the drastic changes that took place in the market, such as unstable credit and market volatility, have made investors jittery and much less willing to lock up their investments in risky, illiquid positions, as the VC model entails. This made it even more difficult for VCs to survive as an asset class. To resolve this dire situation venture investors need to be more careful in selecting companies in which to invest. “VC investors must return to fundamentals and invest in companies that have real addressable market potential, rather than chase those with the hottest technology,” states Srinivasan.

During the second part of his speech, Srinivasan presented some changes in the VC outlook. “First of all, there have been fewer but bigger IPOs, which is why we have seen such a rush among investors to put money into clean tech. Today, investors are looking less at technologies and more at markets,” exclaims Srinivasan.

“Unfortunately, there are also too many pretenders among venture capital firms — the VC firms which have not been able to get sufficient returns to justify the risk profile of the VC asset class. Consequently, there will be a significant contraction among VC firms, where many pretenders will be unable to raise their next funds and will vanish. As a result, there will be fewer VC firms in the future than there are today,” Srinivasan predicts.

“More importantly, today we see a superior shift happening in terms of the VC becoming much more global. This will result in bigger opportunities for VC investments worldwide. However, only the smartest VCs are going to survive, not necessarily the biggest,” states Srinivasan.

At the end of his speech, Srinivasan outlined in four points how he thinks entrepreneurs will need to adapt in order to meet the challenges that the VC community currently faces: (1) entrepreneurs will look to VCs who will participate as active members on their board as opposed to getting the most prestigious firms, such as Kleiner Perkins or Sequoia; (2) entrepreneurs will need to become much more conservative about their valuations; (3) entrepreneurs will need to prepare for a marathon, not a sprint; and (4) entrepreneurs should assume much more risk in their business models, because risk has shifted significantly.

By Nadja Zakharova
(May 28, 2009)

Facts about Ram Srinivasan

Ram Srinivasan is Wellington’s hands, eyes and ears in the largest technology ecosystem of the world as he runs the Palo Alto business development office. As an entrepreneur and manager, he has over 25 years of experience in engineering and marketing management in the Valley, which he loves to share with the Wellington technology portfolio companies.

For more info, see www.wellington-partners.com and for SACC SFs upcoming events: www.sacc-usa.org/sf