For the venture capital industry, lowered expectations seems to be the about the only thing we predict with certainty in 2012. Coming off of two under-performing years, venture capitalists, in near unison, are tempering their outlook as the year-end lull in fund raising and exit activity is expected to carry over into early 2012. With pension funds and endowments growing more cautious in the face of a struggling economy and the generally uninspiring performance of funds, VC’s aren’t likely to see any significant increase in capital inflows. For now, the industry seems to be looking towards the outcomes of two major events occurring in 2012 for any significant change of fortunes – the Facebook IPO and the November elections.
No one doubts that the $100 billion Facebook IPO will be a seminally significant event in 2012, but what remains to be seen is whether it will be the “face that launches a thousand ships (IPOs), “ or a singular success with limited influence over a guarded market. The X factor, of course, is the economy, which, if it continues on its unsteady path to recovery buffeted by macro-events such as the Euro-crisis, is likely to continue to spook the markets. Under those circumstances, investor confidence may continue to wane souring the outlook for IPOs. Investors are not likely to tolerate too many more pop and dumps which have come to characterize the IPOs of 2011. Regardless, the Facebook IPO will be an impossible act to follow and the market is not likely react as kindly to lesser Internet companies.
We can also anticipate much more discernment on the part of both investors and general partners in 2012. Investors are feeling the pinch of more limited capital resources and several years of lackluster returns on existing commitments. We are likely to see the money follow to the better performers, with the more successful VC funds drawing a larger percentage of inflows. And, the general partners, under pressure to produce better returns, will need to be more targeted in their approach focusing on select segments of only the most promising industries such as consumer and health care IT. It’s almost a sure bet that we won’t see much in the way of early-stage funding as VCs have pretty much left those opportunities to the angels.
Although it doesn’t occur until late in the year, the highly charged elections will have more than a peripheral impact on the VC landscape. Under constant pressure from the political left and feeling the heat of a somewhat hostile business climate which has stifled innovation and capital investment, the industry and investors may get a boost of much needed confidence should there be a change in the White House along with a general move towards a more business friendly Congress. It will be wait and see, and probably more of the same until the election grows close.
