Expectations are a significant part of the venture capital investment model. Each day venture capitalists make bets on ideas that have the promise to change the way we work and live, knowing that only a small percentage will be correct. Likewise, bets are made about the industry itself, with many being incorrect over time.
Following are 10 often-heard expectations for the venture capital industry that will likely miss the mark in the coming decade.
1. The IPO market will fully recover in 2010. Despite the optimism expressed by services providers for the increasing number of IPO registrations, the reality is that venture-backed registrations remain very low and many of these companies will never price. Also, structural problems remain with the IPO process, so a full recovery to where we were in the 1990s may be elusive for years.
2. Carried interest will be taxed at ordinary income. Many have predicted this tax change as a fait accompli. Yet at a time when Congress should be doing all it can to stimulate long-term investment, more lawmakers are thinking twice about the implications of such change.
3. The number of VC firms will be cut in half. The venture industry is more likely to see total capital under management and the number of investment professionals shrink as firms raise smaller funds. Smaller funds equate to lower management fees, which ultimately equates to fewer partners. A decade from now we may be looking at the roughly same number of firms with fewer dollars and partners overall.
4. Life sciences investing will never overtake IT investing. In 2009, biotech outpaced dollars invested in software and med tech investing was not far behind. With a growing population and ground breaking innovation in a diverse set of sub sectors, life sciences is poised to become the largest investment sector for VC investment.
5. Early stage investing is dead. With the rise of growth equity investing, it may seem as if seed investing will fall by the wayside. Yet many firms are also expanding their early stage investments by dedicating a portion of their funds to seeding new companies.
6. VCs’ commitment to clean tech is fleeting. While clean tech investing declined in 2009 along with every other sector, it still represented 11% of all venture investing. If VCs were going to abandon the sector, they would have done so when the price of oil fell back from the stratosphere. Clean tech is here to stay.
7. There is no more innovation in IT. We heard similar predictions leading up to the first funding of Google. The intersection of wireless and new media offers a tremendous amount of promise, not only on the periphery but in fundamental ways.
8. Congress will never exempt VC from policies impacting private equity. In 2009 Congress did just that in both the House and the Senate, exempting venture from SEC registration and setting up a hopeful precedent that this distinction can be achieved in other areas of policy.
9. Small companies can’t access government grants. Once intended only for the largest publicly held corporations, government grants became accessible to smaller venture-backed companies with the stimulus bill in 2009, particularly from the DOE. The recognition that emerging growth companies are the future is slowly taking hold in Washington, which is good news for economic growth.
10. LPs are abandoning venture. The denominator effect had many concerned that pension funds and endowments would no longer have an appetite for alternative asset classes and that venture capital would be hit hard. But word from VCs currently fund-raising is that LPs are re-upping for follow-on funds from firms that have performed. While the LP mix in this decade may not resemble the last, there will still be investors looking to get into venture.
Mark Heesen is president of the NVCA and can be reached at email@example.com.