Venture Capital

by Mike Masnick

Venture Capitalists Adjusting... Or Giving Up?

from the question-of-the-hour dept

All weekend venture capitalists and entrepreneurs have been hotly discussing the NY Times article about top tier VC firm Sevin Rosen deciding to give up on its latest fund and return all the commitments. Sevin Rosen is one of the more distinguished VC names out there, and this move is surprising plenty of people. Getting lots of attention are the claims from Sevin Rosen that, "The traditional venture model seems to us to be broken." Of course, if you've been paying attention to the space for any length of time, that isn't a new comment. But, the real question, then, is why not adjust? VCs always like to pitch that they're about more than just the money -- and it's their operating experience or connections that matters as well. If that were true, then shouldn't they be able to actually figure out a way to adjust to the changing market? The same also goes for the claim that "too much money had flooded the venture business and too many companies were being given financing in every conceivable sector." As VC Fred Wilson points out, VCs have always complained about too much money in the market -- when all they mean is that there's just too much competition. If they really do add so much value above and beyond the money, again, the competition aspect shouldn't be an issue.

Finally, they complain about "a terribly weak exit environment," by which they mean the IPO market. However, as many have noted in the past, a weak IPO market isn't necessarily a bad thing. It just means that companies have to actually have a bit more sustainability to their business before they can go public. If you have a real business, it appears you can still go public. So, perhaps the real answer is that Sevin Rosen hasn't yet figured out how they can add real value above and beyond the money they put in, in order to create real businesses with serious exit possibilities. If that's the case, then perhaps it's a good thing they're taking a break to figure out how to change things for themselves. In fact, plenty of venture capital firms might want to do the same. However, this isn't an indictment of the venture capital business, so much as it is of the way that many of the firms in the space have done business.

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  • identicon
    Anonymous of Course, 9 Oct 2006 @ 2:24am

    This may be a good thing

    I've only had limited exposure to VC so I can't say
    this is typical but it seems that intentionally
    underfudning the business then demanding more
    and more equity in the company for additional
    funding is not uncommon.

    The owners lose control of the company that they
    struggled hard build.

    And employees who did much all the work, partly
    for promises of a pay off at the back end, stock
    options, whatever, get "paid for their time."

    I've also seen start-ups piddle away the money
    as if it were free and forget that they need to
    turn a profit eventually... or at least increase
    the value of the company somehow.

    So it cuts both ways I guess. Probably hurts the
    employees the most though. But if the promises
    aren't in writing I guess you'd be have to be a
    chump to give them any creedence.

    Hopefully this weak market will weed out the
    Vulture Capitalists from the Venture Capital folks.

    reply to this | link to this | view in chronology ]

  • identicon
    Robyn Tippins, 9 Oct 2006 @ 8:09am

    Wholeheartedly Agree

    You nailed it. Getting VC or giving it isn't stupid right now, it's ALWAYS stupid if you can't change with the times and make it work in THIS environment.

    reply to this | link to this | view in chronology ]

  • identicon
    jsnbase, 9 Oct 2006 @ 9:57am

    This isn't giving up

    You mention that they're closing their 'latest fund' - and will continue operating the other nine.

    This firm has a strong record, and are the first to try this strategy. Do you have reasons to say that they're weak or stupid, or did you both just skip the article and decide to comment on the shortcomings of VC as a practical concept?

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 9 Oct 2006 @ 9:58am

    It's the era of bootstrapping

    Entrepreneurs are learning that bootstrapping is a much better way to build a business than going the VC route. VC's (and their investors) should go back to doing the things rich people used to do in the old days: give money to charity or other pet causes, or just spend it on random stuff.

    reply to this | link to this | view in chronology ]

  • identicon
    CT Green Warrior, 11 Oct 2006 @ 8:31pm

    Green Business is the New Dot-com

    I would say that "green" investments are where the actions is. Indicators of this theory include; at the end of 2005, Goldman Sach announced that it would only invest in socially responsible companies; the August 2006 issue of Bloomberg Markets, has a great cover story regarding green energy investing as the new focus of many of the leading VC firms in Silicon Valley. The same investors that brought us google and are now seeing green in green investments; and,investments in privately held clean-tech companies reached a record high in the second quarter 2006, according to the Cleantech Venture Network. Investment in North American companies rose for the eighth consecutive quarter, reaching $843 million, up from $513 million in the first quarter. 88 deals were signed, up from 66 in the first quarter.

    When Bill gates invests more than $70 million dollars of his own money in an ethanol plant and Richard Branson commits to spending $3 billion dollars over the next 10 years to combat global change, there must be something to this green stuff.

    reply to this | link to this | view in chronology ]

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