These aren't exactly the best of times for venture capital. In the past few years investors have pumped $20 billion into new companies only to get about an equal amount back when they take the companies public or sell them.
Meanwhile, pension funds and university endowments continue to pump another $20 billion into the system every year. Add it up and it begins to look like there's too much money chasing too few good deals.
Dick Kramlich begs to differ. On July 10, New Enterprise Associates, the firm he founded more than 30 years ago, announced its latest fund, and it's a whopper: $2.5 billion. That's bigger than the $2.3 billion fund raised in the heady days of 2000. The new fund will target life sciences in the U.S. and startups in emerging markets including India and China.
A QUESTION OF SCALE.
NEA has never been afraid to think big: It raised $1.1 billion in 2003 at a time when most firms, burned by the dot.com and telecom busts, were cutting fund sizes in half, to $400 million or less.
Since then the conventional wisdom has said that the venture business doesn't scale. In other words, firms shouldn't expect to grow beyond a handful of partners investing a few hundred million dollars and still make the same kind of returns.
Kramlich contends NEA is the exception and that its investors agree. He says the firm could have raised three times the amount it did.
Even at $2.5 billion, the fund is a gusty move. To make venture-style returns, NEA will have to spend the next three to five years investing in companies that together might be worth upwards of $3 billion in market value. By way of comparison, a $400 million fund could become a top performer with a single home run. NEA will have to hit a handful out of the park and score some singles, doubles, and triples along the way.
Venture capital is a clubby world, and few firms will openly criticize the venture giant. But many can't help but wonder how NEA keeps defying the laws of venture capital economics, some questioning whether the mega-fund's luck will run out.
"A $2.5 billion venture capital fund being raised is definitely going to raise eyebrows, when the entire industry is going to raise $70 billion over this [three-year] cycle," says Mark Heesen, head of the National Venture Capital Assn. "I'd be concerned if it weren't NEA."
That's exactly Kramlich's point: NEA has done it before. A venture fund typically takes 10 years to wrap up, but the $1.1 billion fund raised in the bleak times of 2003 has already invested $650 million and returned half of that amount. (The rest is reserved for follow-on investments in those companies.) The only fund that hasn't done well for NEA was its 1999 fund, and even that didn't have a negative return, and it outperformed many of its peers.
AN ATYPICAL FIRM.
Another reason for Kramlich's confidence is the firm's structure. It's much more institutionalized than most of the firms dotting Sand Hill Road, where small numbers of partners tend to bat around investment ideas in casual Monday-morning gatherings.
At NEA, there are 12 general partners in offices around the world, including Menlo Park, Baltimore, and Beijing. Then there are even more venture partners who have specific industry experience. Take Ralph Snyderman, Chancellor Emeritus at Duke University, who helps vet biotech deals.
Most smaller firms tend to be overshadowed by a few superstar partners—think Mike Moritz of Sequoia Capital or John Doerr of Kleiner Perkins Caufield & Byers—and struggle with hiring and grooming the right successors. Kramlich, one of the few pioneers of the industry who is still actively investing, set up the firm from the beginning as bicoastal, not just relying on brilliant deals trickling out of Silicon Valley. NEA's staff is bigger, and increasingly, younger partners are taking over key positions. Kramlich says the quality of deals is higher than ever.
A DIFFERENT APPROACH.
The biggest reason for NEA's swagger is probably its fundamentally different view of the venture landscape. While most investors fear there is too much money chasing too few good deals, Kramlich says, "that's the most outmoded statement in the venture business." It was true in 1999 and 2000 but isn't anymore, he says.
The reason few venture-backed companies are going public isn't because there aren't good opportunities, he says. It's because venture firms aren't willing to stick with companies long enough to build a business that can withstand the pressures and costs of being public in an age of heightened regulation and scrutiny. So firms lose patience and flip companies early for a less lucrative outcome.
Heesen thinks that's partly true but also says entrepreneurs are less likely to want to assume the risk of running a public company at a time when they can be held personally liable for any financial miscues. But he agrees there are times VCs have "taken the easy way out" rather than raise more money for a promising company.
That, he says, concerns him greatly. "We can't continue to see 90% of our companies going the acquisition route," he says. On the other hand, he says NEA has to be aggressive about cutting off funding to companies that aren't making progress, or the fund will rack up losses quickly.
MAKING BIG BETS.
A big fund also frees the firm up to make capital-intensive investments in areas such as biotech, where a first round could be $50 million, not the $4 million or so most tech companies raise. And it gives the fund the wherewithal to make big bets in emerging markets such as China and India.
NEA now has staff in Beijing, Shanghai, and Bangalore, and the firm recently bought a second building on Sand Hill Road, where it's adding emerging markets experts. The firm has already invested some $200 million from earlier funds in about a dozen Chinese startups, says managing partner Peter Barris. "You have to be able to write a check for $100 million," Kramlich says. "How many firms can do that? Only half a dozen."
As NEA embarks on investing its third fund over the $1 billion mark, the question may not be whether it will perform well, but whether it's still a venture capital firm in the strictest sense. Some might say it more closely resembles a private equity firm that invests in more mature companies. When you've got that much money to deploy, it's hard to justify a classic two-guys-in-a-garage, $500,000 seed deal.
TRUE TO ITS ROOTS?
Naysayers insist NEA simply can't do the kind of roll-up-your-sleeves company-building work that has typified the industry while investing that much money in just five years. And while Heesen still considers NEA a venture fund, he can't think of anyone else in the industry who operates like it.
Critics have a point. Today, half of NEA's deals are done with more mature tech and life sciences companies that need a boost in cash to do acquisitions or jumpstart growth. But the other half are classic first- and second-round deals. Kramlich says the firm is sticking to its roots and adamantly denies it's turning its back on early-stage deals or becoming like a buyout firm.
That may be true, but the bigger NEA gets, the more different it looks from its venture brethren. And at a time when the industry is struggling to post returns, that may not be such a bad thing.