Q&A: Top Tier Capital Partners' Jessica Archibald

Q: Institutional investors withdrew from venture capital after the dotcom bubble. Are they now returning?

A: They are coming back, but in interesting ways. The guys who invested in venture all along are reducing the number of names they back. They are increasing the amount committed to each fund, so the total dollars invested is roughly the same. Then you have institutional investors that are getting into venture for the first time because they have seen the model working. On a relative basis, venture performance is good and it's an asset class they want to commit to. The other consideration is how institutional investors are going to invest in the latest technology or healthcare trends. During the dotcom bubble you could invest in a company when it went public and get a sizeable increase in valuation; you didn't have to invest in that company when it was private to get good returns. Now you see the increase in valuation happening as a private company; if you wait until the company goes public you might lose money.

Q: Concerns have been expressed about the size of valuations. Is this another another bubble?

A: I don't think there is a bubble but we can't turn our backs either. We look at it on a relative basis. Compared to 10 years ago, the revenues of these companies are a lot larger at IPO. So valuations are high but I don't think it is a bubble because the quality of these businesses going public.

Q: How does this work on a sector basis? If Uber has a high valuation, does that mean online taxi services as a whole is too hot?

A: It is more nuanced than that. Uber might have a high valuation but there are about five other companies with a similar business model that don't have high valuations. The situation is in part driven by potential acquirers. Maybe Facebook and Google want to buy messaging apps. The last remaining pretty good private messaging app is going to look very attractive because the next large company that feels it needs a messaging app is going to acquire it.

Q: Which sectors do you find interesting right now?

A: We like healthcare a lot. We find it very attractive from an exit standpoint in that there have been a lot of IPOs in the last 12 months and big pharma companies in the US and Europe is trying to fill their pipelines. There also aren't many VCs investing in healthcare so the valuations tend to a bit more favorable. Security on the technology side is also of interest. It covers everything we do, whether it's mobile phones, online payment, storing documents in the cloud or online education and wanting to protect your information.

Q: In a more globalized VC world, is it important for managers to have competency in multiple markets?

A: It depends on the strategy. If you are investing in companies in different geographical markets then you have to understand what is going on in those markets. If the strategy is to find the best entrepreneurs and bring them to Silicon Valley then there is less need to understand the market dynamic where that entrepreneur is from. What we have seen with globalization is it's not so much a case of where entrepreneurs are going to set up companies as who are they selling to. If you have an entrepreneur in Eastern Europe who is selling to global customers the VC doesn't need to have intimate knowledge of Eastern Europe. They need to understand what is going on in the global economy and then the culture of the buyer, rather than the culture of the creator.

Q: How is Top Tier's allocation to Asia changing?

A: We are reducing our exposure to Asia. Our offices are only in the US. We are not there on the ground so we don't understand the nuances between some of the more local GPs. The first time we invested in a China-focused fund was 2005-2006 and we did it through a well-known US manager with a dedicated China fund. When we became more comfortable with the market we committed to Orchid Asia, a China-focused fund that isn't run by a US manager. Six months ago we did a research trip in Asia and decided the expectations for US venture capital had increased to the point where they are about the same as China. On a risk-adjusted basis the projected returns for the US were higher than for Asia, so we have shifted more of our focus to the US.

Q: A number of entrepreneurs in China have entered the VC space and are raising funds. How important is the emergence of this second generation of managers?

A: We have seen this happen in the US - someone creates a successful company and then turns around and becomes a VC investor, putting money back into the market. It is a good thing because a lot of entrepreneurs are going to be attracted to these people. As a venture capitalist with a successful company under your belt, you understand what newer entrepreneurs are going through, what it's like to run a business. It's an important milestone for venture capital in any emerging market. When you have entrepreneurs raising funds or groups spinning out of mature venture capital firms, it shows a level of maturity that - from a VC standpoint - almost moves you from the emerging markets category to the established market category.

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• Topics
• North America
• Venture
• Fund-of-funds
• Fund-of-funds
• USA
• Asia
• Venture
• Top Tier Capital Partners