View from the Sidelines

Dan asked me to blog a long time ago. I could claim being busy, ignorant or uninformed. Some in the industry would say all of the above. In fact, I was concerned about my confidentiality in the food chain. I talk to a lot of venture capitalists daily about their portfolios, potential investments and, more often than not, about their careers.

I have been working in the executive search business for almost 30 years, a lot of that time with the venture and now private equity firms. This is the best of times and the worst of times for the professionals who hold positions as Investment Professionals – Principals, Partners, and General Partners etc. There are more gainfully employed and unhappy investors now than in any time I can recall. There are more “loose in socket” VCs than I can remember.

The industry has gone through a fundamental evolution from my perspective, and it relates to a maturation of the business. If we assume modern venture capital was spawned in 1980 (prior to that it was family offices and a very few institutions) the industry turned 25 in 2005. If you look at any modern technology related/affiliated industry turning 25 is difficult – look at the software and hardware industries for example. In this case turning 25 was preceded by 5 of the toughest/worst years in the history of investing (you pick, did it start in 1999 or 2000?).

The result was that by 2005 lots of guys had 5 years of experience and the deal sheet to go with it. Many times, not a pretty picture! You can’t hide behind the realty of a deal sheet. The numbers don’t lie.

Also, when many of these vintage 1999 guys entered the business they got minimal economics in some of the biggest funds the industry ever raised! How many $1B+ funds were launched then? The new guys were told “Don’t worry; the next fund will be even bigger! You’ll get caught up then.” Guess what, the next fund was 30-40% the size of the last one and many of the senior guys weren’t leaving. Can you say “cram down”?

Things appear to have improved markedly in the last 2 years. The IPO market has returned, somewhat. Exits with reasonable returns are appearing on deal sheets. New funds are being raised, quickly. An optimism that was missing for several years returned sometime in Q2 this year.

That being said, I continue to talk and listen. This is the best and worst of times for the industry.

Charley Polachi is founder of Polachi & Co., a provider of executive search services to high-tech companies and their investors. He previously was managing partner for the Rt. 128 office of Heidrick & Struggles, which had acquired a search firm that Charley had co-founded called Fenwick Partners.