In episode 30 of the 20 Minutes VC, host Harry Stebings interviews John Taylor, head of research at the National Venture Capital Association. Taylor discusses the origins and sources of venture capital funding, highlighting the shift from pension funds to family offices, sovereign wealth funds, and educational institutions. He outlines investor expectations for venture fund returns, typically seeking 3-5% above public market returns, and the standard management fee structure for VC funds, which includes a 2% management fee and a 20% carry on profits. Taylor also covers the role of VCs in providing talent and connections to startups, the trend of VCs making angel investments, and the increasing concentration of capital among fewer VC firms. Additionally, he touches on the changing dynamics of VC investments, with later-stage rounds involving non-traditional investors, and the factors that influence an entrepreneur's choice of VC partners.
Now, today's show is a special show as it's a bit of a milestone here at the 20 minutes VC being the 30th episode to celebrate this milestone.
This quote marks the significance of the podcast episode and introduces the guest, John Taylor, highlighting his credentials and relevance to the venture capital industry.
In the case of VC, the money is third party money. They're raising it from someone, somewhere, typically an institutional investor.
This quote explains the distinction between venture capitalists and angel investors, emphasizing that VCs raise money from external entities, not their own funds.
So if they're thinking they can do 6% return in the public markets, and then they're looking on a hole from venture for at least nine to 11% returns.
This quote details the expected return rates that institutional investors seek from venture capital investments compared to public market investments, indicating the premium they expect due to the associated risks and illiquidity of VC investments.
"Many funds charge roughly 2% for management fees, and that's the cost of the staff and keeping the doors open and sourcing deals and providing the talent to manage the money."
This quote explains the purpose of management fees in venture capital funds, which is to cover the operational costs of running the fund.
"The 2%, and typically the VC makes its money, his or her money, on sharing a portion of the capital gains with the investors. And typically what they call 20% carry is what you see a lot."
The quote outlines how VCs make money, emphasizing the standard carried interest rate of 20% on profits made by the fund.
"You have a lot of the original founders of the venture industry now retiring... they'll go out and they'll make their own investments."
This quote indicates that retired VC industry founders commonly make personal angel investments after leaving their funds.
"The bottom line is that the money typically first goes in... that could be twelve years or longer from the initial investment."
The quote explains the reason for long lockup periods in VC funds, highlighting the time it takes for companies to mature and reach IPO.
"The interesting thing is that the majority of the ipos in each of that period were biotech companies, which historically is only about 20% of the money."
This quote discusses the recent prevalence of biotech IPOs, suggesting a shift in the types of companies going public within the venture capital landscape.
"Really? Well, yeah, I think it's all on the upside."
This quote emphasizes that VCs are primarily interested in the potential for significant returns when making investments.
"It's much, much more sector specific. Not a sector specific, but subsector specific."
The quote reflects the increasing specialization within the VC industry, where investments are made based on detailed knowledge of subsectors rather than broad industry categories.
"So you even see some of the west coastal coastal firms making investments elsewhere, maybe a university or government lab or something has an intriguing encryption or some kind of ecommerce technology."
This quote explains the trend of venture capital firms looking beyond their traditional geographic boundaries to invest in promising technologies from various sources.
"And the number comes back six. And it was true during and after the bubble, it's been true since, that a venture capitalist with six board seats has a very full workload."
This quote highlights the findings of a study on the typical board-level workload of a venture capitalist, emphasizing the practical limit of board positions one can hold.
"Now, a lot of the rounds are syndicated, and at some point the value added to the VC is the VC's expertise and Rolodex and experience, connections, everything else."
This quote discusses the value that venture capitalists bring to the table, which extends beyond just financial investment to include expertise, connections, and experience.
"Gosh, it's tough. I think the short answer is people, you have many one and two person companies that's gotten funding, but I can't think maybe with the exception of Enron, a one or two person company that's gone public."
This quote emphasizes the importance of human resources in a startup's journey to success and the role of VCs in facilitating the growth of the company's team.
"Tough question to answer, because many of the top business schools are now requiring that their people have four or five years of relevant or domain work experience."
This quote addresses the trend of business school graduates entering the VC industry and the prerequisites of work experience that influence this pathway.
"A lot of the capital is being concentrated by larger firms and in many cases experienced hands."
This quote highlights the trend of capital concentration in the venture capital industry, indicating that larger and more experienced firms are amassing more capital, potentially making it challenging for smaller or newer firms to compete.
"Well, I think it goes back to the question of talent, who they can bring in as the company grows."
This quote emphasizes the importance of the value-added services, such as the ability to attract talent, that venture capitalists offer to startups as a way to differentiate themselves in competitive funding rounds.
"The VCs themselves are coming to the table with roughly the same amount of money they have the past few years. But we're seeing the total amount invested. The total size of these rounds expanding by 40 50%."
This quote describes the substantial growth in the size of funding rounds, indicating that while individual VC contributions remain similar, the overall pool of capital has grown due to the involvement of a wider array of investors.
"All of this is negotiated round by round, and lots of times there is some kind of participation."
This quote points out that the terms of participation for prior investors in subsequent funding rounds are not standardized and must be negotiated each time, which can vary greatly depending on the circumstances.
"Am I going to need $10 million to get to where I'm going? Am I going to need 100 million?"
This quote underscores the critical financial planning entrepreneurs must undertake, assessing the total amount of capital required to achieve their long-term business objectives.
"Harry, it's a pleasure. Good talking with you."
This quote concludes the conversation on a positive note, with mutual appreciation for the discussion and the insights shared.
"Now, for all the resources and figures mentioned in today's show, do head on over to our blog at www.thetomentyminutevc.com."
This quote provides listeners with directions to access further resources and information, highlighting the show's commitment to offering additional value beyond the podcast conversation.