Traditional VC Model: Broken, or Just Tired?
Interesting piece in the New York Times by Miguel Helft, A Kink In Venture Capital's Gold Chain:
The high-risk, high-return venture capital business may have turned into all risk and no return.That, in a nutshell, is the message that a prominent venture firm delivered yesterday to its investors when it told them that it could not continue to take their money — at least not for the time being.
“The traditional venture model seems to us to be broken,” Steve Dow, a general partner at Sevin Rosen Funds, said in an interview.
Sevin Rosen, a 25-year-old firm that is among the most respected in the industry, was in the process of closing its 10th fund and had received commitments from investors for $250 million to $300 million, Mr. Dow said. But in a letter sent to those investors yesterday, Sevin Rosen said it had decided to abort that process.
“We have decided to take the radical step of returning the commitments you have given us for Fund X,” the firm wrote.
Explaining its decision, Sevin Rosen, which has offices in Dallas and Silicon Valley, said that too much money had flooded the venture business and too many companies were being given financing in every conceivable sector.
But excess of capital is only part of the problem, the firm said. In its letter, it bemoaned what it described as “a terribly weak exit environment,” a reference to the dearth of initial public offerings and to a market for acquisitions at valuations that it considers too low to deliver the kind of returns that venture investors expect.
Too much money chasing too few deals with too little return?
I have thought that the traditional VC deal -- with millions invested and the goal of hundreds of millions at IPO -- has gone away. But traditional VCs still want it to be so. Meanwhile, in the web software world, we are seeing the lowered barrier to enry lead to hundreds of apps being launched based on lint and bubble gum: no cash involved. However, there is certainly a place for smart investors to step in and provide growth capital to the few companies that really gain traction.
Fred Wilson weighs in:
[from A VC: Is The "Traditional Venture Capital Model" Broken?]So we need a new approach to the kind of companies we fund and we need a new approach to how we fund them and how we get out of them. I don't see that as a "broken model", just a model that we need to tweak. The answers are pretty obvious actually.
We've got to raise smaller funds.
We've got to do less "hard tech" and more "soft tech"
We've got to figure out how to make great returns on $100mm to $250mm exits
We've got to limit our IPOs to our very best companies
I guess it means that VCs will have to become more "angelic" -- looking to invest less in more companies, and expecting the liquidity to come from an acquisition in much smaller deals.
I have been working as an "advisory capitalist" for some time -- working as a strategic consultant with social tool startups, and guiding product design and development with them -- and continue to be struck that VCs are not getting involved in providing advice to these startups, prior to funding. I bet that in the future, more VC firms will have people like me on board, working on an advisory basis with early startups, and then bringing the best of the bunch into a funding event to help those companies expand.
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