Venture Capital's Coming Collapse

Forbes has a very interesting articled dated January 12th, 2009 titled Venture Capital's Coming Collapse. Sounds as if reality has finally caught up with the VCs too and not a moment too soon.

Here are a few key excerpts:

The swashbuckling risk takers in venture capital have been laying giant eggs for a decade. Could this finally be Sand Hill Road's day of reckoning?

...

The venture capital industry is staring at the most vicious shakeout in its history. Returns are pathetic for most funds, the public offering pipeline on which venture depends for its exit strategy is clamped shut, and with the shares of many big publicly traded tech companies swooning, those firms are less likely to buy up promising upstarts.

...

Heroes of capitalism they’re not. It has been 11 years since the venture industry has returned more cash than it has plowed into investments, according to the National Venture Capital Association. The industry is now managing $257 billion, up from $64 billion in 1997.

...

It would be helpful if there were some way of knowing in advance which firms are going to be the good guys. Apart from those in the very top tier, which consistently outperform, it’s difficult to know.

That’s always been the case in venture. But since equity markets cratered earlier this year, many big investors are scrutinizing all their holdings more closely. Illiquid investments like venture-backed startups don’t look so hot. VCs “have been living off fumes for a long time now,” says one prominent Silicon Valley investor. “If you have any money, the last thing you’re going to do is put it into an asset class that hasn’t generated a return for ten years.”

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Until recently VCs have been able to keep the cash coming despite dismal performance because of the long-shot nature of their business: Investors know that one Google or YouTube could make them millions even if most other bets bomb.

The venture industry promotes that spin. Christopher Douvos is a manager in Palo Alto, Calif. with the Investment Fund for Foundations, an $8 billion investment pool headquartered in West Conshohocken, Pa. He sees the sales pitch of venture capital as “lottery slogans with an Ivy League veneer.” Instead of saying, “Hey, you never know” or “You’ve got to be in it to win it,” the industry talks about “asymmetric outcomes” and “optionality,” he says.

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Just ten short years ago everyone and his uncle was a venture capitalist or at least claimed to be. People who by virtue of little more than pure luck had cashed in big after their employer had IPOed would regularly announce the opening of their very own VC firms. By 1999 half of the Microsoft staff were venture capitalists. Then it all crashed in early 2000. This is now the final nail in the coffin for the industry. Only the very best will survive.

Read Venture Capital's Coming Collapse in full.

We have now officially returned to the era old school creative financing for startups and early stage companies. The entrepreneurial world is as it should be.

Comments

[Silicon Valley Entrepreneur]

Must confess to a feeling of schadenfreude over this news.

[VC Backed]

Couldn't happen to a nicer bunch of assholes.

The venture capital industry can be summed up as "Too much money chasing too few ideas." Isn't that the recipe for inflation?

[Silicon Valley Entrepreneur]

Whatever happened to the Venture Frogs VC firm started by 2 kids as a division of their restuarant? That had to be the goofiest vc firm of the 1990s.

[LL]

You mean these guys? http://www.venturefrog.com/

My guess is that they lost their shirts and went back for their degrees.

[Silicon Valley Entrepreneur]

Yes that's them. They received a ton of press back in the day, despite being little more than lottery winners. It was a crazy period in history. The collapse should be a good thing for us all.

[TJKeech]

This caught me eye: "Menlo Managing Director H. DuBose Montgomery says the 1999 fund “has not completed its performance cycle and has several promising portfolio companies with large revenues, which are still private.”"

So if this is true, perhaps part of the solution is for fund investors to not have to wait for an IPO or acquisition in order to start receiving a return? How about feeding them dividends when cash-flows allow?

[TJKeech]

Here's Steve Tobak on the venture capital collapse:

Bottom line

Okay, so I’m not very concerned about the coming shakeout in venture capital. It’s long overdue, will align the industry with economic reality, and its Darwinian aspect - survival of the fittest - is a good thing.

On the other hand, we should keep a close watch on the root causes of the shakeout, most notably SOX, accounting regulations, the IPO market, mergers and acquisitions, and the state of our investment banks. America can’t afford to lose the entrepreneurial culture that created the likes of Apple, Cisco, Google, Intel and Microsoft. That would be disastrous.

http://www.goldencapital.net/portal/yolo/News/Read/News?action=2&view=view_news&news_id=397

[TJKeech]

At industry events you meet people whose companies have received millions for me too ideas like another version of Facebook. When I ask why they needed all that money, they just shrug. It's insane.

[VC Backed]

Speaking of venture frogs, it got a lot dumber even than that before the 2000 crash. Anyone recall those Inc/fastcompany cover stories on college dorm venture capitalists? One Yale student called his firm "Ivy League" something. The gist of it was that venture capital firms were hiring sophomores to bird dog deals for them on campus. Shame on Inc for publishing that rubbish.

[Neil]

Peter, this good news should be a boon for your start up financing manual. AFAIC, the venture capital industry has room for about 50 to 100 firms tops. We don't need the second and third stringers messing things up.

[SMJ]

Wake me up when the hedge funds collapse.

[Rasheed]

Have you seen this?

The Sequoia Layoff Scorecard

Updated: Back in October, when I broke the news that uber venture fund Sequoia Capital had organized a secret meeting in which it warned its portfolio companies to prepare for the pending financial apocalypse, the revelation was met with some skepticism.

Some thought Sequoia was using the downturn to its own advantage by putting a chill on the startup ecosystem. The sequence of economic events since then, however, points instead to their prescience on the matter. Mike Moritz, general partner with Sequoia, who has backed companies such as Yahoo and Google, recently told The San Francisco Chronicle that nothing had changed the firm’s view since the October meeting.

Their portfolio companies have taken their message to heart and have pruned their ranks. Thanks to hard work by Brendan Gahan, winner of my research assistant contest, and runner-up Susie Lin, we have compiled a scorecard using publicly traded information.

Among the companies, some 20 of them have cut more than 500 jobs, with online shoe retailer Zappos slashing the deepest, taking out 128 positions. It’s unclear how many jobs Jive Software and Widgetbox cut. It was rumored that Jive cut 40 people but the CEO denied that it was that many. We have heard that the total number was 36 out of which nine were contractors.

http://gigaom.com/2008/12/30/the-sequoia-layoff-scorecard/

[FN]

Venture capital is broken. It's only taken the credit crunch and the macro economic crisis to reveal the "Ponzi Scheme" that is VC.

[Lian Pheng Tan]

I loved what he did so I crafted a venture-capital pitch for Santa to illustrate the kind of deal that venture capitalists would fund in today’s economic conditions.

1.

Problem. Parents need a method to influence their non-compliant kids throughout the year. This is a universal problem beginning at approximately age three and continuing up to the teenage years.
2.

Solution. Outsourced bribery via jolly old man who gives candy and toys to nice kids and lumps of coal to naughty ones.
3.

Business Model. Revenue sharing with toy companies and candy companies, licensing image to retailers, and royalties from multiple movies, songs, and publications.
4.

Underlying Magic. Ability to deliver toys to all the kids around the world in one night, make reindeer fly with near zero-carbon footprint, enter homes through chimneys, know what every kid wants, and know whether every kid has been naughty or nice. Zero support issues due to omniscience. Completely lead-free materials. Over fifty patents filed.
5.

Marketing and Sales. Current SEO methods yield 15,700,000 hits in Google. Partnerships with toy manufacturers, candy companies, and retailers to increase Santa’s brand awareness for mutual benefits. Deep inroads into western literature. Creation of long-lasting brand awareness by working with grandparents. You can track market penetration in real time too.
6.

Competition. Jesus or none, depending on your world view.
7.

Team. Proven CEO with hundreds of years of experience. In addition, there are Mrs. Claus, non-unionized elves, and flying reindeer including one with a red nose. All work for free with no stock options. North Pole production facilities are also free.
8.

Projections. Total addressable market of two billion children. Conservatively, 1% market share means twenty million children.

Lian Pheng, Managing Partner, Gingko Capital (lianpheng@gingkovc.com) has widely published on top-tier journals and publications on insider secrets to fund-raising from venture capitalists, entrepreneurial finance and startup valuations. See 99 Insider Secrets to Startup Financing (http://www.gingkocapital.com/2009/02/pre-screened-invitation.html)

[commercial insurance quotes]

Innovation is the key word here, once you have an idea you can really have a progress. The future of capitalism depends on new ideas. You snooze, you lose.