Venture capital funds are marketed as a 10 year limited partnership, with two one-year extensions that can be exercised by the General Partner in their discretion in order to liquidate the portfolio and wind-up the fund.  This implies that the life of a fund should be 12 years, right?  Not in my experience.

Now there's a thoughtful article by Diane Mulcahy, a senior fellow at the Ewing Marion Kauffman Foundation and an adjunct lecturer in entrepreneurship at Babson College, on the topic called "The New Reality of the 14-Year Venture Capital Fund."  This Institutional Investor article discusses recent data that indicates that the median fund takes over 14 years to end.  It's a very interesting article and worth a read.

In my experience, the strategy of the fund and vintage can influence the overall lifespan of a fund.  So for example, 1999-vintage funds that invested in early-stage technology companies had two economic downturns to work through, which extended the lives of these funds.  Conversely, later-stage funds that invested in pre-IPO tech companies in 2006-2007 will likely have shorter lives.  I have worked with several funds where the life span was well over 14 years, so this article was very interesting to me.

Link:  http://www.institutionalinvestor.com/blogarticle/3428857/blog/the-new-reality-of-the-14-year-venture-capital-fund.html#.VOZ73vnF-y4

There's an interesting post by Glenn Solomon, a partner at GGV Capital, on his blog, called "Why Private, Late-Stage Valuations are Skyrocketing."  This is an interesting read, and I recommend it.  In the post, he points to four reasons why valuations of private, later-stage venture-backed companies have seen such extreme valuations:

• Scarcity - private companies are harder to access than public companies, so when a private company raises money, "fierce competition ensues for these scarce slots" in the best companies.
• Momentum - the strategy of paying high valuations in private rounds has paid off, which attracts more capital to the system, and creates momentum for the strategy to continue.
• Fear of Missing Out (FOMO) - VCs want to be associated with winning companies.  While the ultimate metric to judge a fund is the long-term return, in the shorter term, VCs can claim success by investing in companies that are perceived as "winners."
• Gains - a critical question is how much of the returns from these healthy valuations are paper returns and how much are from true realizations.  Solomon does not answer this question.

I generally agree with the points raised in this article, but would add a few more:

• Public valuations.  The Nasdaq 100 Technology Index (NDXT) is up over 17% in the past year.  The stock price for Box, Inc., the cloud-based file sharing company, is up nearly 50% from its IPO price.  Frothy public valuations also add to the private, late-stage valuation frenzy.
• Results and the Halo effect.  Many of these later-stage private companies are posting remarkable results, such as hyper-revenue growth.  It is these stars that lead the pack in valuation, and other later-stage companies benefit from the halo effect.

The debate of whether venture capital is in a bubble has been going on for some time now.  

On the "yes we are in a bubble" side, proponents point to: 

• Huge amounts of money flowing to venture capital funds and companies; 
• Sky-high valuations; 
• Vast numbers of new startups;
• Significantly high burn rates of many startups;
• New entry into venture investing by corporations, hedge funds, mutual funds and others; 
• The advent of incubators, crowdfunding and angel investors; and
• The low interest rate environment.

On the "no we are not in a bubble" side, proponents point to:

• Public tech companies trading at more reasonable valuations;
• The vast market potential for the internet and e-commerce;
• The amount of funds raised by traditional venture firms pales in comparison to the 1999-2000 bubble;
• Venture-backed companies that are going public are more "real" (greater revenues and profiability) than companies that were going public in the 1999-2000 tech bubble; and
• The healthy IPO and M&A environment are providing lots of liquidity;

Now a new article has added to the debate.  In "Silicon Valley Boom Unnerves Some Venture Capitalists" a few additional points were raised:

• Venture capital moves in cycles and this cycle will end.  The question is when it will end.
• There's a real war for technology talent, which leads to higher startup costs.
• The funding environment is frothy, both for venture capital funds and for startup companies.

My take on this is that we are in a very healthy venture capital cycle, and that the peak of the cycle will likely occur after interest rates rise meaningfully.  When this occurs, valuations will have to come down, and then lots of companies will be under water from a valuation perspective.  This will lead to losses and the cycle will end and move toward correction.

What do you think?

Here are some links to prior posts on the bubble question:

http://www.allenlatta.com/allens-blog/is-venture-capital-in-a-bubble

http://www.allenlatta.com/allens-blog/fred-wilson-on-the-bubble-question

http://www.allenlatta.com/allens-blog/tech-bubble-andreessen-and-conway-say-no

http://www.allenlatta.com/allens-blog/tech-bubble-two-views

Aswath Damodoran, the valuation guru and Kershner Family Chair in Finance Education at NYU Stern, has posted an interesting article on pre-money and post-money valuations in the venture capital context on his blog Musings on Markets.  The blog entry is "Blood in the Shark Tank: Pre-Money, Post-Money and Play-money Valuations" and it is especially useful to entrepreneurs who are looking to raise venture funding.

Link: http://aswathdamodaran.blogspot.com/2015/02/blood-in-shark-tank-pre-money-post.html