Some see shakeout coming, others that asset class is self-sustaining
Venture capital executives differ on whether the industry is due for its own disruption.
The value of venture capital exits peaked in 2014 at $80 billion, dropping to around $50 billion in 2015, 2016 and 2017, according to a private equity report by consulting firm Meketa Investment Group for the $349.3 billion California Public Employees' Retirement System, Sacramento.
Smaller venture firms that do not have the capital to continue investing in their portfolio companies as those companies grow and stay private longer, as well as newer, less experienced firms formed after the financial crisis might not make it through the next downturn, some industry insiders say.
There was a big shakeout in venture capital after the financial crisis. Several well-known firms faded away and a number of new firms formed quickly, said Kevin Campbell, managing director, private markets, at DuPont Capital Management, Wilmington, Del.
"If your firm started in 2011 the market has been very strong and, more than likely, your performance on paper is strong, and more than likely you've had a limited number of realizations (exits)," said Mr. Campbell, who manages funds of funds. "A number of groups are talking to investors and pounding their chests a bit with pretty good returns — but not a lot of realizations."
"How will those groups fare in a market with a bit of headwinds? I think this market is just waiting for another shakeout," Mr. Campbell said.
But others think the tremendous amount of capital available to invest in venture capital-backed companies will create an exit route.
The amount of capital being raised — as well as interest from entities like Soft Bank, which has said it plans to invest close to $1 trillion in technology startups in the next 10 years or so — has created its own ecosystem, said Gregory Stento, Boston-based managing director at alternative investment fund-of-funds firm HarbourVest Partners LLC.
The kind of capital available to the industry is enough for it to sustain itself, he said: "Today, there are sizable exits within the private markets ecosystem."
Sales between venture capital and private equity funds, or between venture capital managers could represent one-third to a half of the exits occurring in the industry in the future, he said.
In 2017, the vast majority of venture capital-backed company exits, 73%, was through sales to a larger company, but sales to private equity firms — accounting for 19% of exits — is becoming more common, Meketa's report for CalPERS shows. Only 8% of the exits last year were through initial public offerings.
"We've seen private equity firms buy venture capital-backed companies" to merge them with existing companies in the private equity firms' portfolios, Mr. Stento said. "If companies are going to continue to stay private longer, there will be a lot more company growth by acquisition as well as organically."