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Venture Capital and the Internet Bubble: Facts, Fundamentals and Food for Thought

Venture Capital and the Internet Bubble: Facts, Fundamentals and Food for Thought. Thomas Hellmann and Manju Puri. An Industry in Crisis?. Or an industry on a much need diet?. Rates of return. Overall VC industry 1-year average: -18.2% 3-year average: 54.5% 10-year average: 28.4%

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Venture Capital and the Internet Bubble: Facts, Fundamentals and Food for Thought

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  1. Venture Capital and the Internet Bubble: Facts, Fundamentals and Food for Thought Thomas Hellmann and Manju Puri

  2. An Industry in Crisis?

  3. Or an industry on a much need diet?

  4. Rates of return • Overall VC industry • 1-year average: -18.2% • 3-year average: 54.5% • 10-year average: 28.4% • Internet: • 1-year average: -38.3% • 3-year average: 69.7% • Telecom: • 1-year average: -27.7% • 3-year average: 35.7%

  5. What are the fundamentals of venture capital? • Alternative Investment Class • Real Estate versus Venture Capital? • VC = Value-added investors? • Stanford Project on Emerging Companies • Interdisciplinary project • 170 Silicon Valley high tech start-ups • Data on whether and when companies get VC • No dotcoms!

  6. SPEC: The external product market effect of VC • Obtaining VC associated with faster time to market • hazard rate increase by factor of 1.79 • Larger effect for innovator companies • Innovators self-select into VC • Time-to-market effects does not driven seem to be driven by selection alone

  7. SPEC: The internal professionalization effect of VC • Founder replacement • Support or Control • With VC: 61% of founders replaced • Without VC: 36% of founders replaced • VC gives shorter time-to-replacement • Friendly or hostile? • In 40% founder remains involved • Effect same for VC and non-VC replacements • VC effect part of a broader pattern of professionalization • Executive team building • HR policies

  8. A brief history of the structure of VC industry • Old days: • Tight collusive networks • Post 1979 evolution: • Differentiated competitors • Unique skills and proprietary deal-flow • Returns justify “expensive” GP contracts

  9. The Internet rocks the VC industry • New opportunities: • Big and visible • Low barriers to entry • Winners materialize faster than losers • Steady state: see mix of new winners and older losers • Wrong extrapolations create feeding frenzy

  10. The VC industry responds • New entrants with little relevant experience • Wall Street types • Effect on experienced VCs • Danger of defying trend • Temptation of increasing fund size • Change in VC business model: • Invest in more companies • Place more money => less syndication • More later stage • Increase in diversity of VC structures • Incubators, corporate VCs, bank VCs, angel networks

  11. How can the VC industry recover now? • Can VCs live by their own medicine? • Defensible value-proposition • Value-adding component • Competitive differentiation • Building a franchise • Accountability • Inconsistent reporting • Governance • Legal constraints • Reasonable valuations • Revisiting GP terms • Implications for public policy! • Focus on enabling public goods

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