Business Week Points out VC issues
Business Week's Sarah Lacy has an article that reinforces some of the structural VC issues that have been discussed here regularly.
There's simply no big overall tech movement getting Wall Street revved up, and among entrepreneurs, the feeling is mutual. Sarbanes Oxley and other regulations have made the prospect of going public far less appealing.
The picture looks worse among acquisitions. Sure, the usually sleepy third quarter saw $10 billion come in acquisition proceeds, but that was spread among 90 deals. Companies like TellMe, the voice recognition software company founded in the late 1990s that snagged $800 million from Microsoft (MSFT), are in the minority this year. Far more common is the tech company that plodded along for more than six years, chewing through some $30 million in venture cash to eventually get bought for $50 million or so. Indeed, the median length of time it took companies to get bought was the longest Dow Jones VentureOne has seen since it started measuring the industry 20 years ago. Meanwhile, valuations keep rising, as billions of dollars in VCs’ coffers fight to get in what few great companies are out there.
Internally, many investors are worried that only a handful of firms will break even on the current crop of funds, much less post stellar returns. In hushed conversations over breakfasts at Buck's and lunches at the Sundeck, VC veterans are wondering aloud whether they should get out, or, after years of playing boardroom quarterback, whether they've still got the chops to actually build a startup.
However you slice it, unless something changes, venture capital is in for upheaval. Some venture capitalists are going to find themselves out of a job. Overall, the industry may become more the font of outsourced research and development for big firms and less the breeding ground for the next great tech powerhouse. And returns will be lackluster for the majority of firms left out of the best deals.
Yikes. That's pretty pessimistic. I don't think that it is quite that bad, but I do think that LPs are resigned to the fact that returns won't be as strong as in the past and great returns will be even more concentrated in fewer firms than in the past.
If I could wave a magic wand, I would make at least half of the committed funds to venture capital go away. Even though that would lead to there being many fewer VC firms and VC partners, it would also mean that funds were smaller, investment decisions were more disciplined, and capital would be doled out much more parsimoniously. That's good for entrepreneurs who can get funded and very good for ultimate returns. There might be fewer start-ups, but I also think that there would be more small scale financings to give company concepts a try.