VC Learnings for Make Benefit Glorious Future
72 virgins. We all know who gets them. No, I’m not talking about Al Queda or the Taliban. I’m looking closer to home, right here in our VC backyard.
One the industry’s most venerable VC firms yanks the megaphone from the hands of the New York Times and the Wall Street Journal to pronounce its own craft “damaged.”
“The VC Model is Broken” screamed several mainstream headlines in October as GPs and LPs rushed to pick up the pieces left by the incendiary suicide bomb. The martyr tape continued: “There is no way to make money in this business. So we have decided to end it here and now. Good luck to all. We’ll come back to you in the glorious future with some new ideas. After we go to heaven. After we meet the virgins!”
I’m hoping there are lots of virgins out there for guys who want to end it all. Meanwhile, there are lots of VCs out there doing just fine, thank you, on the basis of the hundreds of exits we’ve seen since 2002. And we’re not talking $1 exits as one of the martyr tapes suggested (btw, I would expect martyr YouTube videos by now. They are free and only take a bit more savvy than calling the New York Times.)
Here is the rub. The martyr tape might work elsewhere but it has never worked in American Business. Sure, companies exit businesses (see IBM ThinkPads) — but they don’t shut themselves down entirely. They don’t just say “our margins are going down and we will just shut down.”
But that’s precisely what is happening in the VC industry today. Instead of reinvention there is retirement. And instead of retirement, there is suicide bombing. “If we can’t do it nobody else can!” Kaboom.
Next time: Why minicomputers from the 80s don’t sell anymore. And what you can do about it without calling it quits.
East Coast VC said on November 8, 2006
I’m guessing that you and Steve Dow aren’ty fishing buddies:)
Balto said on November 8, 2006
To extend the analogy into what I am sure is unintended waters…this article cries “stay the course!!”, “stay the course!!” with no factual backup to the assertion that the “hundreds of exits” are actually adding up to financial success for the venture industry. If venture does not work out you have a place in the Bush White House….
Alexis Lakes said on November 8, 2006
Perhaps I’m getting long in the tooth, but, from my perspective, VC has constantly been reinventing itself. Those that don’t leverage change, well, they do tend to go away. Nothing wrong with that. And whose to say that they are dodging a bullet or missing the opportunity of a lifetime until all the cards have been dealt?
Remember the bubble? The “poor sods” who couldn’t get into those over-priced deals are now geniuses in hindsight for not over-deploying capital during the heyday. Of course, some firms *did* make a couple of bucks during the bubble, so…
So. Sevin has a point. If they have a model they are convinced is broken, they will never make money. Perhaps for their size and structure, the model as they have it spec’d *doesn’t* work.
So. Bart has a pretty good point too. Just because Sevin can’t figure it out, or because Sevin isn’t structured to morph with this curious animal called private equity, doesn’t mean we all have to call it quits.
In any event, Bart, your last line… Well, you crack me up. I like a person with a sense of humor.
-Alexis
David Waxman said on November 8, 2006
Bart – Right on… Sevin’s model is “broken” – It is very tough for $500M + VC funds to generate a strong return, (even Sequoia raised less capital in thier most recent funds) in these days of Sarbanes Oxley and smaller M&A exits. However, that does not mean that sub-$150M funds, even those that are emerging managers, can not generate strong returns by choosing the right entrepreneurs in less capital-intensive spaces and hitting more “doubles or triples” with $100M M&A exits or by leveraging a new exit channel that we at Azla-Advisors (www.azla-advisors.com) are working on.
David Waxman
Managing Director
Azla Advisors
Poor Taste said on November 8, 2006
Bart:
I guess I understand what you are trying to say about Sevin Rosen, but your post was done with incredibly poor taste on more levels than I would bother to explain.
Pascal Levensohn said on November 12, 2006
Bart makes an important point about the current M&A environment that has been lost in the controversy surrounding the context of his remarks.
I wrote a separate post on this general topic “Yes, Too Much Money Is Chasing Too Few Deals in VC” on http://www.pascalsview.com on October 30.
Bart’s important point has to do with the need to re-calibrate your investment parameters to be successful in the current investing environment. It’s been clear for some time that we live in a world of $50 million to $150 million acquisition exits for many VC-backed companies.
This is a tough world if you have $35 million – $50 million innvested in a company and get caught at the low end of that range– my partner, Keith Benjamin, has written extensively on his blog, http://www.sfventure.com, about this trend persisting trend of “take-unders” as opposed to take-overs.
More on this on pascalsview if you are interested…
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