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"In my opinion, there has not been a better time to invest in the true venture capital market as now because there are just not that many people operating in it," said the founder of New York VC firm Greycroft Partners LLC, speaking Wednesday at Canadian VC firm iNovia Capital's annual general information meeting in Montreal. In February, Patricof wrote a blog saying the VC industry had changed, largely because exits are more problematic now that companies have difficulty listing and surviving with a market capitalization of, say, $100 million. But in Montreal, Patricof noted that there are only a few players doing real venture capital investing -- sinking small amounts of money into bona fide startups. That means there's less competition for the real VC investors, who therefore have the pick of the most exciting entrepreneurs. Firms that have raised several hundred million dollars find it difficult to justify the small investments that young companies need, and entrepreneurs don't want to lose control of a company by accepting the $10 million or so investment that big funds are offering. Large fundings can also disrupt the partnership between investor and entrepreneur by creating artificially high valuations, and therefore unreasonable expectations. For example, Jerome FitzGibbons, executive vice president of Collective Media Inc., told the meeting that his New York company was offered more money and higher valuations than what it settled on in a recent fundraising round. (The Deal Pipeline subscribers can learn more about the round here.) However, the company, which has developed audience targeting technology for advertisers, felt comfortable with the $20 million funding it settled on in April. The Series B round was led by Accel Partners and included Greycroft and iNovia. "The venture capital industry is not dead," said Patricof, who has been in the business since 1969. "The problem is there's not a lot of people who do what iNovia does and what we do." Patricof grew his original investment business into the buyout giant Apax Partners, which today has $35 billion under management. He stepped down from the management of Apax several year ago to return to his first love of backing entrepreneurs. Greycroft is a $75 million fund that makes investments of $500,000 to $3 million. In his keynote address to the meeting, Patricof reiterated his contention that IPOs have become a difficult means of exiting a VC investment. Generally, it's hard to find an underwriter and market maker for a company worth less than $250 million -- and not many VC-backed companies grow that large. What's more, the increased administrative burdens from such developments as the Sarbanes-Oxley Act cost more than small companies can afford. The problems associated with IPOs mean that VC investors today have to rely more on trade sales as exits, and that means they have to be careful in their initial investment, ensuring it is small enough and early enough to profit if the company sells for $70 million -- the average trade sale for a VC-backed company. He added the VC market would improve if some means were established to allow investors to buy late-stage companies other than through an IPO. - Peter Moreira
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Just four months after warning of the new paradigms in the venture capital world, Alan Patricof is proclaiming the current environment as good as any to be backing young companies.
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