Less is more in the VC world, says a prominent early-stage VC, while a shrinking capital pool should produce better quality investments.
"Venture capital is artisan; it's a cottage industry", Atlas partner Fred Destin, told the Daily Telegraph earlier this week, "it's better with small firms, small funds, better capital efficiency."
Destin added that the current shortage of venture capital is a positive: "The shortage is a good thing. It means small funds, small capital utilisation; generating some great returns."
He reckons huge funds, which tend towards trying to automate the VC process, have produced too many 'average' VC funds.
Whereas the overall VC industry hasn't grown in a decade, individual VC firms have had individual successes with young companies, he said.
Destin does not think seeding VC companies with government money is an answer.
The £325m UK Innovation Investment Fund is 'wrong headed'.
"All they doing is keeping a bunch of VCs employed, frankly," he says.
I'm afraid he is totally wrong.
The 2000 internet bubble bust was survivable because there were still VCs investing and quite a few of the success stories come from investments made in that time. This is much, much worse because the financial sectoris not putting any money into VC (and what limited funding there is is getting distracted by the windmill brigade and the promise of profits from state tampering in the energy market). The result will be highly skilled people who lose their job in established companies leaving the technology industry for ever rather than contributing to the next generation of start-ups.
When the financial system refuses to fund technology the government needs to do something. They should invest in a hands-off manner as limited partners in the best small , sector focussed VCs. They should get the money by shutting down every single local enterprise company and support quango for the electronics industry. Take the billion or so quid per year that is going into salaries, pensions and offices for timewasters and stick it in commercial Venture Capital for tech companies and just watch the UK tech industry take off.
The enterprise companies are a waste of space because their mission to support industry is in fundamental conflict with EU laws on state support so they end up spending most of their time and energy trying to find loopholes.
Example: Scottish Enterprise, annual budget about £400M. Has about 1500 staff and lots of office space. Invests less than £50M into industry. Commercial VC - funds under management > £500M, staff 25, overheads maybe £10M/year.
That's hitting the nail on the head, Tom. These bureaucracies set up to dole out VC funds are a waste of space. And you're right it would be better to give it to existing commercial VCs, maybe with some strings attached as to the areas to be invested in, and also, possibly, give it to universities and incubators which have support mechanisms for start-ups.
The commercial VC space is a competitive sector which has had no trouble attracting money historically.
There needs to be market discipline in venture capital as everywhere else. You are making the assumption that there is no money available, whereas in reality there is but the industry provides no returns to those investors. There is still money out there (plenty of it) but investors CHOOSE not to allocate to European venture.
Why would it be different with government money? Are you expecting it to somehow start producing better returns or to perpetuate a situation that is not sustainable ?
If you want a sound and high performing innovation sector, you need a sound and selective VC ecosystem. It needs to prove itself in the eyes of private investors and build itself up from a position of strength.
I maintain that you cannot throw money at the innovation ecosystem and expect it to blossom. You need great investors funding great entrepreneurs and demonstrating success, and there is no shortcut to such outcomes.
the data on government intervention in direct investment or fund investment indicates poor returns over time. This is not good use of taxpayers money and not the policy role of government IMHO.
Thanks very much for that, Fred, I'm sure you are absoutely right. It is quite clear to me that government bureaucrats waste iinnovation funds, whereas VCs know how to pick winners. But, with the terrific R&D being done in Europe, I would have thought investors would be keener to invest here than they are.
I agree with Fred. You only have to look slightly outside of nanoelectronics (nanomaterials, PV, etc) and there is funding happening, possibly too much in PV in fact.
But semiconductors have a generally poor track record in the past ten years. Also I'm afraid a significant proportion of the teams seeking money are simply uninvestable in despite having good ideas and need to rethink their structure and expectations. Once they do that they will become attractive to the VCs who definitely do have the money to invest.
Also I think the point on Scottish Enterprise is a little unfair as a lot of their money goes into very early funding for university projects with their Proof of Concept and Proof of Concept Plus funds. No VC and few angels are going to invest at this stage and so they perform an essential task that would otherwise not be performed.
Excellent points, Mike, thank you