(NOTE—Stop if you’ve heard this one. This posting was previously published in my October e-newsletter . )
It’s my recurring fantasy.
I’m driving down Sand Hill Road when I see a VC standing by the curb, his Brioni in tatters, his Ferragamos unshined. He holds a placard that reads, “Will fund for food.” OK, so if it comes to that, there will be lots of takers. When it does, I also picture the limited partners, who put up the fund’s cash to begin with, locking and loading semi-automatic weapons.
My point is this: Before we end the aftermath of the last boom and really begin the much-anticipated next, there is a need for one more shakeout—the VCs themselves. The venture community remains bloated in terms of firm numbers, fund size, portfolio valuations, insufferable arrogance and undaunted stupidity. Richard A. Shaffer, founder and editor of VentureWire, a Dow Jones subsidiary, says a venture shakeout began three years ago and continues. Some people say more than half the current firms and as many as 70 percent of current general partners will be gone when the dust settles. It seems to me technology will be a better place for it.
Don’t get me wrong, some of my best friends are VCs. I consider early players like Don Valentine, Ben Rosen and Art Rock on my short list of heroes. They were among those tough visionary pioneers who literally fueled technology’s revolution. They had the patience to nurture teams who developed, then refined weird stuff, then refined it again until the weirdness was gone and the way we lived improved. The original batch of VCs had its share of losers, but so many were trail blazers, daring and greedy enough to bet on the future. They took risks, lost big, and occasionally won even bigger.
By contrast, today’s population has a handful of real winners who shine like diamonds in a coal mine. Too many of today’s VCs are adrift in risk amortization concerns. They actually believe you can forecast five years forward into a market that does not exist today. Too many think as bank clerks, serving as functional potholes on the road to recovery.
Even for VCs with wisdom and operational experience, venturing has become a tough game. Says Kevin Fong, a managing partner in Mayfield, one of the Valley’s oldest and most respected firms, “General partners will be re-examining their motivation for being in the business. “
They should. We need a revival of the tough savvy that characterized the earlier era when VCs behaved with a decided lack of self-importance. If any held an MBA, they kept it to themselves. At their essence, was a tough-etched wisdom that comes only from operational experience. Most joined venture firms after operational successes of their own, often having failed repeatedly until they got it right.
I think several things need to happen before technology’s equilibrium is restored and the cradle-to-transaction lifecycle pattern is restored. VCs should:
•Give it back. VCs, like professional poker players, operate mostly with other people’s money. Estimates of the current VC fund “overhang” range from $80 billion to $100 billion. To their credit, a few firms have closed funds and given the money back. They get two percent to three percent a year in commission, even when the money is sitting idle. If they don’t know how to invest at this time, when the economy is perfect for entrepreneurialism, then they should return the money to their investors and go home.
•Shrink to fit. Once the fat is out of the fund, VCs might be able to invest an appropriate amount to establish realistic company valuations. Today’s funds are just too damned big. I can name a half-dozen early phase start-ups looking for $2 million to $3 million. Each is being coerced to take closer to $10 million, with terms that will kill them because of the artificial upside expectations. Says Shaffer, “A number of funds continue to lie to themselves and their limited partners, by carrying portfolio companies at values that will never be realized. These firms will disappear—and deserve to.”
•Leave cloning to biotech. Compared with mainstream VCs, sheep are rugged individualists. Only a handful of leadership venture firms seem to find the first-strike originals in each promising category. Then, the flocking firms fund a thousand clones, which confuse the market and dilute everything connected. Says Roger McNamee , a rock/jazz musician whose day jobs include serving as principal at both Silver Lake < http://www.slpartners.com/> and Integral Partners< http://www.integralsys.com/public/partners.htm>, “I worry that most good ideas will get overwhelmed by me-too competition. It remains to be seen how many start-ups will be able to navigate this minefield and move on to greatness. Will the number be large enough to allow all of today's venture firms to raise a next fund? Probably not.”
•Learn the trade. Sometimes I think of the circus daredevil calling out his warning, “Kids, I am a paid professional. Do not try this yourself!” The top complaint among entrepreneurs I know is VCs without operational experience. Bob Metcalfe, Ethernet father and a respected technology combat veteran, is now a Polaris Ventures general partner. He says, “After two-and-a-half years as an apprentice, I can say that VC investing is complicated. Most failing VCs are unqualified. “
•Cull the dumb. I really have considered writing a book on venture horror stories called, “Really Stupid Ideas.” Three things stopped me: (1) NDAs I’ve signed, (2) lawyers who enforce them and (3) Entrepreneurs who are afraid to speak on the record. “It’s sort of like knowing someone with a machine is a homicidal nut,” a serial CEO confided, “You know he’s dangerous but it’s unhealthy if he finds out you ratted.”It seems to me it’s time for Charles Darwin to visit Sand Hill Road. VC firms have been too fruitful and have multiplied too many times, thinning bloodlines and allowing recessive genes to dominate. The industry needs to restore its dormant courage gene. The legendary L.J. Sevin, co-founder of Sevin Rosen, who provided the lead venture for Lotus Development and Compaq Computer, once told me, “Ya gotta have more balls than a billiards hall to play this game.” Brains help too.
As for VCs wondering how to reduce bloated funds, you can always contact me for suggestions and my check-mailing details.
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