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Is The "Traditional Venture Capital Model" Broken (continued)?
I got a call yesterday from Miguel Helft, the reporter at the New York Times, who wrote the original story about Sevin Rosen that prompted my first post on this topic.
He's doing a follow-up story on the subject and wanted my perspective. Since I had already provided that (my perspective on his story) to the world on my blog, I was pretty careful in my comments to him. I don't want to be perceived as taking a shot at one of the great firms in the history of the venture business. I hope my comments come across as properly respectful.
But I do think that one person's "broken market" is another man's "land of opportunity". And that's what I tried to convey, both in my post and my comments to Miquel yesterday.
Comments (6) | Posted October 24, 2006 in Venture Capital and Technology
Comments
While I don't know enough about the specific factors that led Sevin Rosen to withdraw their tenth fund, I can offer a few thoughts on the issue of whether the traditional venture capital model is broken.
First, it seems to me that a lot of confusion results from a popular misconception related to Web 2.0.
Specifically, people see challenges that venture capitalists are facing related to Web 2.0 (ex. (1) the low cost of creating a Web 2.0 company means that entrepreneurs do not need venture capital; (2) each Web 2.0 portfolio company has dozens of competitors, (3) Yahoo and Google are buying companies before they can grow, etc.) and conclude (wrongly) that the venture capital model is broken.
What they seem to have forgotten is that Web 2.0 companies are just a small fraction of the overall venture capital universe.
While there may be serious challenges related to Web 2.0 companies, there are "healthier" new areas ex. synthetic biology and regenerative medicine, appearing every day not to mention the fact that venture capital is absolutely thriving in emerging markets such as Brazil, India and China.
So, while some venture capital firms may need to revisit their Web 2.0 investment strategies, and the chances of generating astronomical returns in this particular area may be fewer and farther between, one need look no further than Sequoia's return on YouTube to know that venture capital is still alive and well.
Posted by: Simon | Oct 24, 2006 9:21:23 PM
alot has changed over the past 10 years and web2.0 companies have to spend a fraction of what companies had to spend back when excite, yhoo, netscape, etc were launched. joe kraus was quoted as saying it cost them $200k to launch jotspot and that same setup would have cost them around $7MM had they tried to do it when they were getting excite going. most of it has to do with opensource code and not having to purchase solaris, sun hw, etc. the price of bandwidth has fallen in the same fashion as well. this basically means that you don't need to raise a boat load of money to get a startup going...unless of course your startup requires a huge investment like in the case of the tesla electric car or building datacenters. if you notice which vc firms are winning or at least participating in funding the web2.0 companies(no, i don't believe they will all be winners but that isn't my point), it is those firms with younger associates or partners on board who actually know the entrepreneurs. case in point, roloef botha worked with chad and steve at paypal and dave sze worked or has known jay adelson for quite a while. ryan mcintyre worked and knew a few of the early postini folks. these types of relationships take away the suit and tie persona of a finance guy and at least imho are where and how the succesful entrepreneurs are raising money when they go to the venture community. having said that, the folks i gave as examples could have funded their new companies on their own or with the help of friends. i guess what i'm trying to point out is that for a vc it isn't necessarily what you know but who you know especially if or when supply of money is higher than demand as SR appears to be saying.
Posted by: tomo | Oct 24, 2006 10:55:09 PM
i think the question is wrong. of course VC is not broken -- there will always be great financial opportunities backing new enterprises.
instead the questions might be:
is there an oversupply of capital in VC as an asset class? that is, can existing markets create above-market returns for all the money flowing into VC investments? and if not -- and there never is enough return; someone has to be bottom quartile -- what percentage of VC will be a bad investment for LPs (that is, they should have bought T-bills or Vanguard S&P 500 fund?)
and then, if there is an oversupply of VC capital (I think there is), what factors weigh most heavily on the performance of the asset class? poor IPO markets? too high VC management fees? etc.
Posted by: steve | Oct 25, 2006 7:01:01 AM
I digress a bit from the topic but what about corporate startups and corporate venturing? I don't see much of experience described for such companies in the net and couldn't provide answers on my own. But I did create questions: http://roman-rytov.typepad.com/miles/2006/10/corporate_start.html
In one sentence - what's the difference betweein bootstrapping a company in a classical way vs. asking money from the company you're working for. What do you think?
Posted by: Roman Rytov | Oct 25, 2006 8:50:23 AM
Your posts and related comments make some good points, but miss the underlying math. Looking at the long history of venture, the vast majority of value has been created after IPO. Given IPO hurdles, one could argue that the venture market will remain "broken" until there is a more receptive IPO market. Your argument that returns are possible with M&A is weak. Buyers have been burying valuable technologies. True value creation occurs after IPO, with the IPO validating new markets and/or competitive position againse incumbents. Fortunately, there are signs that the IPO market is returning, with a few recent deals like Riverbed. Let's not dilude ourselves. The goal of venture exercise is to create new, large companies, not M&A flips.
Posted by: keith benjamin | Oct 25, 2006 11:27:20 PM
I think VC is totally flawed...
You can build a company from virtually nothing, Markus Frind - owner and only employee of plentyoffish.com put up one of the biggest dating web sites in North America - from nothing!
Ad revenue has turned everything upside down. Most of new web entrepreneurs won't need any cash from outside, we can pull up any new venture with a spare computer and a broadband line and go from 10's of users to MM's in less than a year with total overhead cost of several thousand dollars for 5 to 10 beowolf off-the-shelf computers and a 100Mbit-1Gbit dedicated line.
If you invest in Web2.0 or Web3.0 company with 10 employees and 100 servers with pretty poor code behind service you can be shure you will loose all your money becouse guys like Markus and rest of us will burry you in no time.
Why? Becouse we are mostly one-man company with lots of low cost computer fire power and lots of opportunity cracks we can use against bigger competitors (like T-Rex vs. little rodent just before the meteorite crash :)).
Posted by: Mayo | Oct 31, 2006 12:33:08 PM
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