2011: What’s In Vogue, Or Not

1. Prediction in Vogue: 2011 will be the year of the “Super Angel”

Reality: Given all the angel investment activity now, and the fact that it has never been easier to start a new company (low cost of computer power, plenty of talented people, plenty of real estate, etc), too many “me too” companies will be started, leading to too many companies dividing up small and emerging markets. And because angels do not typically have the ability due to their size to support numerous companies over many rounds, many angels will experience unacceptably high loss ratios. This will cause many of them to dramatically slow down their new investment pace so that they can better support their more promising companies.

2. Prediction in Vogue: China is the centre of the VC-world

Reality: While the growth rates and level of investment activity in China are very seductive, the recent dramatic IPO activity harkens back to NASDAQ 1999 and will in hindsight be considered the high water mark for VC activity in China. Notwithstanding all the euphoria in China (which is very exciting) and their robust IPO market, the broader index of leading Chinese public companies is up only 3.3% year-to-date. The dramatic capital inflows – which have masked many structural issues in the Chinese economy – will lead to increasing rates of inflation and other social dislocations. Given the poor operating and financial conditions of many Chinese enterprises, banks will find it difficult to raise interest rates to contain inflation, which will lead to an unexpected and dramatic reduction in lending activity.

3. Prediction in Vogue: Twitter is worth much more than $4 billion

Reality: Ultimately all companies must create economic value that earns a return acceptable to the underlying invested capital. It is one thing to “build an audience,” but ultimately investors will demand that all of these social media properties generate a cash-on-cash return to invested capital. The fear is that Twitter will be determined to simply be a micro-broadcast network; this realisation will send shudders throughout the social media world and will undermine all the hyper-valuations we are seeing today in this sector. And what per cent of tweets go unread any way?

4. Prediction in Vogue: VC industry has weathered the worst of it and is poised for recovery

Reality: While the VC industry has certainly suffered mightily, the year ahead will still be challenging. Starting in early 2008 – and probably lasting through 2011 – we will have witnessed an industry being cut more than in half. In 2008 VC’s raised nearly $28 billion; in 2010 it may only be $12 billion. There are nearly 500 VC firms as members of the National Venture Capital Association (where I am a board member); arguably less than 20% of those firms can predictably and reliably raise new funds in this current environment. 

5. Prediction in Vogue: With the general economic recovery, new VC investment pace will significantly increase

Reality: While the absolute number of new companies funded may increase given the prominence of “Super Angels,” marginal VC firms – many of whom are late in their current fund’s new investment phase – will be reluctant to make new commitments. This will be exacerbated by the need to unexpectedly put more capital into existing portfolio companies, stressing capital reserve assumptions. The 3Q10 saw $4.8 billion of new investment commitments, which was meaningfully more than the $3 billion raised by VC firms in that same quarter; as the industry invests this “capital overhang,” new investment pace will moderate unexpectedly fast.

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