He basically demonstrates how the traditional venture capital model of the 1990s -- with its reliance on very large 'hits' -- no longer works. This is something we've known in Europe for many years, but he makes a case that even in Silicon Valley, VCs now need to learn how to generate returns from a more balanced approach to risk.
In Peter's view, VCs should take a page from private equity's playbook, learning how to handle valuation, exit timing and funding risk, in addition to the traditional focus on markets, innovation and team.
In other words, VCs need to manage their investments as much for the downside and middle-exit scenario, as for the big upside. This is really what traditional growth equity investing has always been about, and it's clear that in the current environment the growth equity niche is growing into a more established asset class.
But I really like Peter's suggestion that even early-stage investing can take a more measured approach to risk to reduce the variability of outcomes. By focusing as much on capital useage, valuation, timing of follow-on financing and timing of markets, VCs can increase the number of 3x returns while still having a shot at the occasional 20x.
What Peter does not mention in his article is the importance of capital efficiency. A lot of the middle-exit risk VCs take is the result of overcapitalising companies, which depresses returns precisely in the most likely range of outcomes, ie exits of $80-120m (see Why you have to build companies for less). By focusing more on core metrics early on and controlling cash useage VCs (and the founders they back) retain more options to make a positive return.
Like Kennet, Peter's fund sat out the post-bubble market of 2001-2003, making few investments. Unlike Kennet, his conclusion is now to move into adjacent markets (cleantech) and focus on selective early-stage investments. This is because a rise in later-stage valuations (driven by VCs looking for deals closer IPO) has created a price bubble.
I agree that too many VCs are making bets on the near-term IPO queue, but I also believe there are plenty of capital-efficient, appropriately priced investment opportunities in mature growth companies. The key is to find these entrepreneur-led businesses (which typically do not need to raise capital), and to have an investment proposition specifically adapted to their needs. This is why growth equity is so different frmo late-stage VC.