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I was able to get up to Notre Dame for the Stanford game a little over a week ago and was pleasantly surprised to learn that the Notre Dame Tech Forum was hosting an event at Innovation Park. This event included several Notre Dame-related startups pitching themselves followed by a very interesting talk by Tim Connors (formerly of USVP) on the current state of venture capital. I meant to write about this all last week, but with wedding planning and other things, I wasn’t able to.

Tim made some very interesting points about venture capital in general as well as about how Notre Dame and Innovation Park can play a role in the startup ecosystem. He spoke quite a bit about how the larger VC funds are not the way to go and that the newer, smaller funds will be more successful. One of the most interesting points he made was that at a 2x multiple for a fund, VCs make just as much in fees as they do in carried interest. This fact has allowed VCs to live a very comfortable lifestyle while not providing very drastic returns to their limited partners. He then showed us these returns - in the ten trailing years from March of 2010, the venture industry has returned -3.7% but in the ten trailing years from March of 2009, the venture industry had returned 25.8%! That is amazing. Now that we are ten years past the bubble, the venture industry does not look so good (at least when looking at trailing returns).

He attributed this partially to pension funds investing in venture capital as an “asset class.” Venture capital is merely a subset of the private equity asset class - not an asset class of its own. Fred Wilson wrote a post about the math behind the size of the venture industry which supports Tim’s claims. The venture industry got too big to provide meaningful returns.

After talking about venture capital in general, Tim went on to talk about how Notre Dame and more specifically, Innovation Park, could have more success in the startup ecosystem. This was especially interesting to me because I worked at Innovation Park for a summer and for part of the following school year and always wondered how it would work out. The ideas behind Innovation Park are great, it was just always very hard for me to picture South Bend, IN as a hotbed of innovation. Tim said that South Bend could win now more than ever by “importing founders.” He said that if the Notre Dame MBA program was more encouraging and friendly towards founders and that as the ESTEEM program evolves, more and more founders will be willing to come to South Bend and to house their ventures in Innovation Park. I hope Tim is right - I would love to see Innovation Park continue to grow and produce very meaningful companies.

I’m still on the hunt for a job. I’ve had a TON of first round interviews (5 last week!) with a lot of interesting companies, but am still looking for a good job that may help me progress toward my goal of working in venture capital someday. I am thinking that (for me at least) will come in two forms: working for a startup or working for a VC. I just don’t see myself going into investment banking. I’ve interviewed with one VC-like company (Summit Partners), but didn’t get an offer out of that one. I’ve also interviewed with a startup (ExactTarget out of Indianapolis) and am waiting to hear about their second round later this month.

I am heading to San Francisco in a week for my Fall Break with a group of MBAs. We will be visiting a lot of tech companies (Google, Cisco, Intel, HP, Oracle, etc.) and I will be meeting with at least one VC while I’m out there, which I am really looking forward to. I’m hoping that we’ll get to meet some ND grads working with startups too while we’re out there. My thoughts are that if I can find a job with a startup in one of these tech hubs (San Francisco, Boston, NYC), that I can eventually work my way to the other side and become a venture capitalist. We’ll see!!

On Friday, Tom Crotty of Battery Ventures spoke to our Venture Capital Fundamentals class. He had some really great insights into the VC industry, especially in trying to land a job in the VC industry. I’ve written about finding jobs in VC before, but Mr. Crotty pointed out something that I hadn’t read before and thought was VERY useful: most VC firms will be hiring right before they raise a new fund. This is when they will (hopefully) be growing their assets under management and thus need more staff to support operations. This is also the time when VC firms will promote current employees, and might need to fill the positions that employees were promoted out of. Just a little food for thought…

I noticed an interesting post on TechCrunch with this chart:



I thought that was very encouraging for startups and VCs. I wrote a couple weeks ago about how I hopes that Q2 was the bottom for funds raised by VC firms and this news leads me to believe that prediction even more. Now that IPOs are “coming back” somewhat, limited partners might become more optimistic and more willing to put more capital to work in VCs, allowing VCs to raise more funds.

I understand that IPOs will most likely fall in comparison to M&A in terms of VC exits over the coming years and that the coming IPOs are definitely not major, but I still think this is an encouraging sign.

So I read that a bill was proposed which would require VC’s with over $30 million in assets to register with the SEC (which will cause a lot more reporting requirements). This sounds like bad news for the VC industry. Most VC funds have a very small staff to begin with, so it will become quite difficult to keep up with new reporting requirements. They’ll have to start hiring more analysts/associates (like me!) to help, which will in turn reduce their profits, since analysts and associates are cost centers who usually bring in no additional revenue. I completely agree with most people who feel strongly against this sort of regulation over VCs. VCs are not very levered (if at all), and do not pose much “systemic risk” to our economy. They are one of the main sources of growth in our economy! Without VCs, there would be less innovation and fewer entrepreneurs that help grow the economy and make America the country it is. Regulation will only slow down the capital flowing to the entrepreneurs who need it. (On a side note and more selfishly, however, I wouldn’t mind the possibility of this regulation to cause VCs to hire a few extra analysts or associates and scoop me up with them!)

I’ve been reading a lot over the past several days about how VC funds raised only $1.7 billion in Q2 of this year. That is down significantly from previous years, and hopefully the “bottom,” since it would be a miserable year if Q3 was even worse! This talk reminds me of a post by Fred Wilson about the size the venture industry should be. He called it the VC Math Problem. According to him, there should be about $15 billion to $17 billion in the venture industry each year. This is significantly below the last 4 years:

It doesn’t seem to me like the VC industry is “broken” as some say, simply that it needs to “right size.” After years of exuberance, it is time to come down to a steady, sustainable size. This actually reminds me of the definition of inflation that one of my teachers gave us. He called inflation “too much money chasing too few goods and services.” In the venture industry, the money is the funds coming from limited partners (obviously) and the goods and services are the entrepreneurs and their ventures. There are only so many promising entrepreneurs, and through the “inflation” of the venture industry, those entrepreneurs commanded higher investments and valuations than they needed and sub-par entrepreneurs may have received investment simply because there was so much money floating around. Since this “inflation” was accepted everywhere, the exit markets became inflated as well. Now, with everyone watching what they spend very carefully, they cannot afford the inflated exit price required by VC firms for their portfolio companies. That leaves us stuck…plenty of good companies that cannot be sold at a valuation that would generate enough returns for the investors.

So how do we fix this? I have no idea…I’ll leave that up to people much smarter than me. I can only assume that it will require some more time at low fund raising levels like we’ve seen for the past two quarters while this “inflation” decreases and we return to normalcy and a loosened exit market. Then I hope the venture industry will be a little smaller - closer to the levels Fred Wilson talks about. This will require smaller funds, like those we’ve been seeing; and smaller, earlier investments. This is exciting to me because if I do find a position in the VC industry, I’d like to be working with early-stage companies.

I did a lot of research this morning on how to break into the VC industry. I found some great articles by Seth Levine: How to become a VC and How to get a job in VC (revisited). They were both somewhat discouraging and honest, so I am thankful for the time Seth took to write those. What struck me the most were his thoughts on networking. To get a job anywhere in this economy, networking is obviously a must, but that seems even more true in venture capital. I think that this blog is a great starting point for me to begin to “get out there” - once I’ve read up enough, I’ll be able to begin networking with various VCs via (that’s a lot of v’s) different social networking sites as well as the more traditional email/phone call methods. I’m learning a ton through my internship at Innovation Park and plan on learning a lot more when I take the Venture Capital Fundamentals course in the Fall. I’m hoping that everyone talking about “recessions being a great time to start a business” will lead to a high amount of deal flow through VCs in the next 6 months to a year, which will be just in time for me to find a job to help said VCs. We’ll see how that goes…