As the public markets are swinging in all directions with a downward bias, I am having flashbacks of the Sequoia slide deck that made the round less than two years ago, relating to private capital and venture capital in particular. Click here if you have forgotten, although it wasn’t long ago. Less than two years later, I am reminded about the turbulence that the segment went through when stumbling across a new batch of turbulence, of a very different sort but perhaps born out of the shakeup of 2008. I am referring to the public debates that are occupying venture investors, entrepreneurs, and all students of the venture capital business, about the optimal venture capital fund profile, investment size and terms: small funds vs. big funds, true seed funds vs. faux, raising big vs. little money, and the miscellany of subjects around the perimeter of this general core.
We haven’t heard about the Sequoia slide deck – RIP Good Times – since its initial sensation, but for a while there it really shook things up. It drew national attention to the direct influence of limited partners (LPs) – pensions, endowments, banks, insurance companies – upon a seemingly isolated and independent market segment. More precisely, it drew attention to the direct ties between public and private markets. We used to consider the influence of public markets upon the private mainly in terms of exit valuations and exit alternatives (i.e., IPOs), not thinking about the place that private LP interests hold in a broader portfolio of public holdings, and how turbulence in the public realm can limit the interest of LPs to hold private assets. In the fall of 2008, our perspective broadened.
Almost two years later, it is true that the system has done a great deal to work through the sub-prime credit bubble that burst, but now there is a sovereign debt issue on the horizon. Almost two years later, it is true that the stock markets have moved way off catastrophic lows, but more recently these have also moved way down from highs and are still moving. I would not suggest that the market is anywhere close to the state of freeze-out in which we found ourselves almost two years ago, but we were pretty shaken up back then and the memory lingers. Important lessons were learned, market consequences were experienced, and it isn’t easy to turn a blind eye less than two years later.
If one of the lessons learned at the time was that the losses of LPs are felt in ripple waves well into private markets, and ultimately by entrepreneurs and innovators who require venture funding, one should consider how limited partners will behave if the stock market should decline much further, if the economy should deteriorate a tad more, if the sovereign credit risk that looms should cast its shadow a bit wider. If there is a risk that limited partners should stir up ripples once again – and, evidenced by aggregate VC deal volumes since late-2008, it isn’t clear that prior ripples have completely faded – perhaps entrepreneurs and venture capitalists would be well served to plan ahead and strategize accordingly.
I am infinitely cognizant of the virtues of small funds and the integrity of seed investing, but the subject is beginning to feel a little bit passe, and a bigger point may be missed. The most important characteristic that entrepreneurs should look for in an investment syndicate, based on some of the issues noted herein, is staying power and the ability and willingness to keep up its support. This has nothing to do with small vs. big or true seed vs. faux, but with liquidity and commitment. In any environment, these are important qualities. In the current environment, even more so.
