Struggling Venture Capitalists Hunt for New Ways to Score Big

Struggling Venture Capitalists Hunt for New Ways to Score Big

iStockphoto/Vallarie Enriquez

U.S. stock indexes may be soaring to record high levels, but venture capitalists are struggling to keep pace. Venture capital funds gained an average of 7.2 percent in 2012, lagging both the Dow Jones Industrial Average, which rose 10.2 percent, and the S&P 500, up 16 percent, according to data released last week by Cambridge Associates (PDF). Those scuffles are nothing new: U.S. venture capital funds have underperformed the equity markets in the ten years through 2012.

That weak long-term performance has made it harder for VCs to raise money and, as The Wall Street Journal reported Friday, it has led limited partners to become pickier and more vocal about which venture capitalists they entrust with money. Venture firms raised $2.9 billion from 44 funds in the second quarter of 2013, representing a drop of 33 percent from the first quarter of the year and a 54 percent plunge from the second quarter of 2012, according to data published last week by Thomson Reuters and the National Venture Capital Association. The VC fundraising total for last quarter was the lowest since the third quarter of 2011. “These are tough venture-capital fundraising times,” conceded Mark Heesen, the president of the National Venture Capital Association, when we spoke by phone last week.

There is some good news for venture investors: the amount of profits distributed to investors in 2012 was the highest since 1999 and 2000. And fundraising has at least rebounded from the lows of recent years, such as the $13.4 billion raised in 2010. It climbed to $19 billion in 2011 and then $19.7 billion last year. “Fundraising has been in a reasonable range and remains below what managers are investing, which has favorably reduced the industry’s capital base and should also help boost future returns,” Theresa Sorrentino Hajer of Cambridge Associates said in a statement.

The trends have created something of a barbell effect in the industry, with the best-performing large funds growing larger and lots of small funds attracting investors interested in specific niches. The top five venture capital funds accounted for 55 percent of fundraising during the second quarter of the year. Meanwhile, the ranks of mid-size funds have thinned out considerably. “Many long-standing, pedigree venture firms are heeding the guidance from limited partners and raising smaller, more agile funds,” Heesen said in a statement accompanying the NVCA’s quarterly data. “Consequently, dollar values of capital under management are declining from historical levels. Counterbalancing this trend is the recent uptick in the venture-backed IPO market which, if sustainable, may very well draw more dollars into the asset class in the coming year.”

Still, the recent performance woes and the resulting pressure from disappointed limited partners have forced venture capital firms to make some changes, including putting some VCs on the firing line. “Although the message is rarely as overt as telling a firm to cut staff or else, it gets through all the same,” noted the Journal’s Deborah Gage.

Given that backdrop, venture capitalists worried about finding the next great company or visionary – the newest Bill Gates or Steve Jobs or even Nick D’Aloisio, the British teenager whose social-media company, Summly, was acquired by Yahoo for a reported $30 million a few months ago – recognize they need to also try something new and different – bold, even. As a result, the venture capital firms are recruiting some new blood – including a few veteran, connected journalists – as they look to make and promote new investments in an age of “content marketing.”

“VC firms don’t have time to work on their marketing or PR strategy,” noted Heesen, adding that, “it’s not just about giving entrepreneurs money any more. It’s also about helping them, with their marketing, move to the next level. Journalists can help companies with their marketing, too.”

The Silicon Valley firm of Andreessen Horowitz, which is home to some partners who never worked in venture capital before they signed on, is betting that increased attention to content will make a difference to investors. The firm recently hired Wired Senior Editor Michael Copeland to direct its new “content strategy.” Andreesen Horowitz is counting on Copeland, who previously worked for Fortune, Business 2.0, Red Herring, the Venture Capital Journal, the Washington Post and other daily newspapers. As TechCrunch noted, this move is a part of the firm’s strategy for “being a full-service VC agency that provides more than just a check.”

Michael Holland, who heads Holland & Co., a New York investment company, told me: “VC firms are now having more challenging times when it comes to raising money, and journalists can help because they are well connected, can obtain information in a very short period of time and analyze large chunks of information and can work well under a deadline pressure.”

In addition, VC outfit Sequoia recently recruited the Wall Street Journal’s Ben Worthen to head its content work. Last year, Andreesen Horowitz added former Twitter staffer Elizabeth Weil as a partner on the Market Development group, TechCrunch noted. And Battery Ventures just hired former Wall Street Journal reporter Rebecca Buckman to develop content, including some about the firm's portfolio of investments, according to All Things D.

Meanwhile, First Round Capital has moved solidly into web publishing by launching First Round Review, a site focused on entrepreneurship, which it says it wants to be the “Harvard Business Review for startups,” according to Forbes

The industry has gotten a wake-up call and recognized that it must do more to impress prospective investors. The standard for success in the world of venture capital is clear, though. As Heesen noted, “At the end of the day, it’s all about the returns.”