Meec introductory presentation jan 2015 copy
You would never hear this from a Sand Hill Road Venture Capitalist (VC), but the details are in and professional venture capital is mostly the exception, not the norm, as a funding source for startups.
In fact, it’s less than 1 percent. At NBT Equities Research we more often than not look for opportunity in the 99% of emerging growth companies initially funded by angel investors, founders and public venture capital via Alternative Public Offerings (APOs).
Why? Because again…if you look at actual results… more VC-backed new companies fail than succeed, and since 1999 the VC funds that have backed the lucky “1%” have barely broken even. Their investors would have earned 3X more return on their “venture” money by putting their VC fund investment into money market funds.
Moreover, the good business and entrepreneurship professors Robert E. Wiltbank, PhD. and Warren Boeker, PH.D. show non-professional angel investors with 3100 investments and 1137 exits earned an average 2.6X return on their capital with an average holding period of just 3.5 years (AIPP Angel Performance Data report) Wiltbank, Robert and Boeker, Warren, Angel Investor Performance: Presentation (November 2, 2007). 2007 Kauffman Symposium on Entrepreneurship and Innovation Data. Available at SSRN: http://ssrn.com/abstract=1027911
Here are the biggest myth-busting facts revealed by Diane Mulcahy, director of private equity at the Kauffman Foundation and a former VC herself, in Harvard Business Review that focuses on entrepreneurship.
Myth 1: Venture Capital is the Primary Source of Startup Funding
VC financing is the exception, not the norm, for startups. Historically, less than 1 percent of U.S. companies have raised capital from VCs, and the VC industry is contracting. But less venture capital does not mean less startup capital since non-VC sources of funding, such as angel capital, are growing.
Myth 2: VCs Take a Big Risk When They Invest in Your Company
VCs take risks with investors' money, not their own. The typical VC commits only 1 percent of partner capital to a fund while investors commit the remaining 99 percent. The VC revenue model that generates guaranteed and cumulative management fees regardless of investment performance insulates VC partner personal compensation from the risk of poor returns.
Myth 3: Most VCs Offer Valuable Advice and Mentoring
VCs differ in how much effort they put into these nonmonetary resources, and the quality of advice and mentoring from VCs can vary widely, so founders who want more than capital from their investors should conduct a thorough due diligence on a VC firm they are considering.
Myth 4: VCs Generate Spectacular Returns
Mulcahy cites the data and findings from the Kauffman Foundation report she and her colleagues published last year about the under-performing VC industry. The report provides data on historic VC industry returns, and the Kauffman Foundation's experience as a long-term investor in VC funds.
Median return from all VC funds 1997-2010? About 1%...really.
Myth 5: In VC, Bigger is Better
The contrary is true for both the industry and individual funds. Industry and academic studies show that VC fund performance declines as fund size increases above $250 million.
Myth 6: VCs are Innovators
VCs may be well known for funding innovation, but the VC industry and business model have not seen significant innovation in two decades. The VC fund structure, fund life and economic terms have remained the same for more than 20 years. Note to GPs: Increasing the standard 2 and 20 compensation model to 2.5 and 25 is not innovation.
VCs will continue to play a significant, but smaller, role in channeling capital to startups, Mulcahy concludes. The contracting VC industry and new funding sources now available to founders are finally "shifting the historical balance of power that has too long tilted too far toward VCs."
Action Step: These results from the VC world make sense for a number of reasons:
1) The Silicon Valley is NOT the only place in the world where great entrepreneurs live and innovate—but you would never know that from how VCs invest. 90% of VC money goes to Silicon Valley/Silicon Alley technology startups—and most of the rest to biotech plays in California/Maryland and Massachusetts.
2) Follow-the-herdism is the rule, NOT the exception in professional VC funds. The “Linked-in or Twitter for farmers” idea that gets funded is NOT like being an early investor in Twitter or Linked-in. Most herd investments fail to get to critical mass simply because…they are niches that don’t NEED VC capital.
3) The VC model requires $500M IPOs or buyouts for the VC to make up for the majority of investments that go to ZERO. NOT EVERY company needs or wants $500 million to scale their company…in fact MOST do not.
KEY POINT: Early to late stage venture investing in industries you know and talented entrepreneurs is NOT the sole domain of professional VC investors. Study after study proves YOU can outperform pro VCs with a handful of private and public VC type investments.
For Entrepreneurs: When the VC turns down your deal, be grateful!
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University General Health System, Inc. is a diversified, integrated, multi-specialty health care provider that delivers concierge physician and patient oriented services providing timely and innovative health solutions that are competitive, efficient and adaptive in today’s health care delivery environment. The UGHS business model anticipates the acquisition of acute care “host” hospitals and the development and operation of regional health networks within a defined radius of each host hospital that can provide services under the Company’s acute care licenses. Such regional health networks and ancillary services will reflect a vertically integrated, diversified system, which will include provider-based “Hospital Outpatient Departments” (HOPDs) of the host hospitals and may consist of Ambulatory Surgical Centers, Free-Standing Emergency Rooms, Free-Standing Procedure Facilities, Diagnostic Imaging Treatment Facilities, HBOT/Wound Care Centers, and/or other ancillary service providers. The Company currently operates a 72-bed acute care hospital in Houston, Texas. |
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Will the government shut down again in February 2014 over the debt ceiling? |
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LAST SURVEY RESULTS When to you think the FINAL JOBS Act Regulations will be finished?
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Founder and Editor-in-Chief for NBTEquitiesResearch.com. Contributor and Anchor for the Fox News Channel and Fox Business Network 2000-2013. Chairman & CEO of NBT Group, Inc., a boutique private capital investment bank and investor relations organization.
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