Venky talks about the future of VC investing, including what’s hot in the enterprise, social media, and what will change in the tech industry as companies monetize globally. Venky will give a keynote address at SuperInvestor in San Francisco of Feburary 4th. Read more in the SuperReturn blog here.
Apart from a few standout exceptions, the U.S. VC market has been in decline over the last decade, with less money raised, and some disappointing returns. Do you think that will change any time soon? Why?
I predict that the 2009 to 2015 vintages will be some of the best vintages for the venture capital class and that in 2015 we will see a meaningful expansion of the VC market. The Venture business has always been cyclical. In 1999 and 2000, limited partners flooded into the asset class based on venture’s 1, 5, and 10 year returns. In 2008, 10-year venture returns were negative, which resulted in many institutions throwing in the towel and leaving the asset class. But we need to look through the windshield instead of the rear-view mirror. We are currently seeing an unprecedented flood of innovation in many different areas. Sectors we are investing in at Menlo include cyber security (BitSight) the connected home (Dropcam, Roku), and social gaming (MachineZone), just to name a few.
It’s become easier than ever to launch a software start-up, but harder than ever to monetise it. What new technologies will change this? Will the continued surge in mobile and cloud technologies make things easier or harder?
While it’s never been easier to start a company, it’s never been harder to build a lasting company. This is not going to change due to the incredible globalization of the tech industry. A startup has to be global from day one, or it runs the risk of being disrupted by some other foreign company. The continued surge in mobile and cloud only exacerbates this trend. While everybody points to how easy it is to start a mobile or internet company, not everyone realizes that every major internet/mobile company to hit scale has raised venture capital in the hundreds of millions of dollars. Uber, a Menlo portfolio company, is a great example of a company going global in mobile cloud, along with Facebook, Twitter, Dropbox, AirBNB, LinkedIn, Pinterest, Evernote, etc.
Has social media had its day as an investment proposition?
Social media is just another form of communication. Humans are wired to be social animals. Our need to connect with each other is becoming integrated with the technology we use everyday like mobile phones and tablets. Because of this, social media will continue to create meaningful investment opportunities and disrupt traditional industries. Take shopping, for example. Poshmark, a mobile fashion marketplace for women, has seen enormous growth due to the sense of community the experience provides users. Tumblr, a Menlo portfolio company acquired this year by Yahoo!, connects people all over the world by making it super simple to share our thoughts, feelings, and media. Other companies like Cinemagram, Instagram, and Snapchat are reinventing how we communicate by allowing users to share media in new and compelling ways.
Do you think that enterprise software now presents a more compelling investment case than consumer orientated software?
Infrastructure software continues to be very compelling, especially in security, system management, storage, and servers. Menlo’s decades-long research in the space (with companies like 3PAR, IronPort, Coraid, Tintri, and Avere Systems), has shown us that enterprise software plays are more linear outcomes. To compare the technologies to a game of baseball, enterprise software results in a lot more singles, doubles and triples. Consumer-oriented software is a home run business, but with a high strike-out ratio and a smaller number of big winners. Enterprise will have a large number of small- to mid-size outcomes and some really large outcomes. In a nutshell, more venture capital returns will be created on the enterprise side but more media ink will be spilled on consumer investments.