- Jay Maharjan
Ever wonder if we are going through another bubble, here is a synopsis on the VC outlook and the assessment of the performance from this past year
VCs are not going through a bubble.
Though media is quick to pointing out that the Venture Capital industry in the United States is going through a bubble, the reality is, contrary to what happened during the dot com bubble, this time around – there are some legitimate deals floating around. It is hard to believe that companies like Groupon turned down 6 billion dollar buy out offer from Google – but, if you look at it closely, Groupon has some stellar revenue numbers. Groupon made 2 billion dollars this past year, which is a far cry from the inflated numbers of the dot com era. Besides, in my opinion, though Google has nice change sitting in the bank, the search engine leader needs to keep on innovating profit centers besides their cash cow – the adwords (95% of google revenue comes from adwords – in turn supports rest of the projects). Social media companies like Facebook and Groupon could very well take active roles in search and ad generation in the future.
What VCs are counting on
A rough rule of thumb among VCs in the economy like this is that they are counting on about 4-7 companies to go mega IPOs in a given year. Though smaller funds are struggling to balance their operating costs against zero to negative return, the funds with billion plus mark are quite healthy. The VCs that sustain, as it is true even in the good economies, will continue to rely on the handful of larger IPOs.
What VCs are going to look for
Like the core mantra for the most of this past decade, the business fundamentals rule the day. Gone are the days that idea on a piece of napkin would command millions of dollars in VC funding. Ideas alone will not get you funded. You do not need a flashy company with a household name. But, a non-glamorous yet with strong revenue, a sustainable client base, and experienced management in place WILL get you noticed.
As most of the VCs are starting to count on social media to be the theme of the upcoming decade, it would not hurt for entrepreneurs to start building companies – within social media space positioning for a quick exit. After all, with FaceBook emerging as a threat for Microsoft and Google ( and with Microsoft, Apple and Google collectively holding 90 billion in bank), there are serious exit opportunities for emerging social media companies that leverage on larger platforms like Facebook.
As a rule within the US based VC communities that it roughly takes 20 -25 million dollars to reach M&A or an IPO stage, more and more smaller venture funds will have to rely on and start looking to work with start-up companies with clear exits.
Opportunites for VCs to focus on emerging market
In the past, funding projects in emerging markets was an afterthought for most VCs. As a VC guest on my television show would put it – that (VCs) like the aspect of walking down the street in the Silicon Valley and meeting with entrepreneurs face to face. Though geography plays a major rule when it comes to VCs influencing their investments, It is time that American VCs (even smaller funds) expand its reach and exploit the enormous untapped funding opportunities in emerging markets like India, China and even smaller developing economies (Among some of the small nations – there has been a strong shift in governance, has seen exponential growth in consumption and governments are feeling the pressure, need to back, protect foreign venture funds).
VCs will be around
In the developed economies, where there is zero percent interest offered by banking system, both individual and institutional venture investors will always go for higher risks for possibility of getting significantly higher return – over short term liquidity and no return.
Jay Maharjan is management and strategy consultant at Jay Maharjan & Associates based out of Los Angeles. Maharjan can be reached at firstname.lastname@example.org