Venture firms are fighting to raise funds, hampered by poor investment returns and difficult economies. In 2005, 110 venture funds in Hong Kong raised $15.5 billion, down from 200 funds that raised $28.6 billion in 2000. There are many firms that have dropped off according to Richard lynn, a principal at VC firms FCL venture in Calif.
From last 15 year VC success is reducing or is close to single digit growth or sometimes negative. Firms are trying to reach a new market for funds. Their main source of profit is IPO and it is getting fewer. To generate return or profit, earlier, it just took two to three years but now it is taking 5 to 11 years. Venture that receives huge investment can survive for at least 5 to 6 years and can show improved business. The one of the reasons IPO is downsizing is, investors have not seen performance of VC doing any improvement and there are few signs that the things will improve. The venture industries current returns are unsatisfactory according to a recent report of rightsizing the US.
Since the last 30 years VC have shown good performance. During the good time of VC, many companies like Arabica, Montego have performed well with an average return of 30%. However the value proposition of VC in two fields, investors’ sides and for entrepreneurs have weakened. During 1990 to 2002, VC attracted lots of investment which caused 190% increase in deals. But this was too quick which in turn invested in many inexperienced VC. Hence by 2008 investment reached lowest which further decreased VC proposition. To attract investors , VCs need to design attractive projects and competitive returns. But if VC finds harder to generate returns it means it is offering higher risk to lower yield projects for investors. So they are losing their chance to attract entrepreneurs to improve their returns.
According to Arebica, big firms have lots of money to invest in smaller firms and companies that are based on the internet need low capital, so why will they go to big firms? But here one can ask how low VC will take to get back on track i.e to recover from liquidity. According to AIG financial products VC needs to generate investment of 3.5 times while companies are generating only 1.6.
Is restructuring an option?
Probability of gaining active investment through downsizing is highly mathematical, as it will require lower investment. According to JP Morgan based in Mexico, an estimated 55% decrease in industry size is a good estimate. It is not the size that matters, but thoughtful, competitiveness and quality VC are more focused towards investing huge capitals in small directions.
VCs are required to return their basics of being highly patient, thoughtful and incorporating sustainable practices. When big companies invest in VC they are not focused on making big companies, rather on how to help small firms to become big. VCs have the ability to evolve quickly but important is changing according to the needs of the market.