Fear and Loathing in VC land--animosity towards VCs is rampant
By Tom Foremski - January 30, 2006
SVW reader Penguin points to VC Rick Segal's recent post about the quandary venture capital is in.
To summarize: Web 2.0 companies don't need much capital and GOOG, YHOO and MSFT can step in and buy them just for the heck of it for a few million and the VCs don't get a look in. Plus there is not much distinction between the Web 2.0 startups.
Welcome to the world of the new rules startups; no VCs required, although an Angel or two helps... It's a knowledge capital world these days and GOOG and pals offer the largest platform for rolling out Web 2.0 services/products. How can VCs compete against that?
But also, there is widespread animosity towards VCs today. I've been covering Silicon Valley since 1984 and I haven't come across as much hostility towards VCs from startups, as I have over the past 18 months.
Why? Because of the many outrageous VC practices during the dotcom boom and afterwards. VCs always get their pound of flesh and then some.
But what goes around comes around. We live in a serial entrepreneur community here in Silicon Valley, and memories are still very fresh.
The strategy for startups these days is to bootstrap--go for Angels if you need money. And if you do need to pitch the Sandhill row, first raise your valuation as much as possible through your own efforts and financing.
I have a lot of respect for many VCs. Those are usually the ones I come into contact with, because they are out and about and pitching their investments.
There are hundreds of VCs that I never come across and seem to be baffled about what to invest in; they follow each other with a herd mentality and thus mess up the markets for all; and with almost no IPO market exit strategies rely on selling out to one of a small number of large companies--which keeps valuations in check.
When I recently met with VC M.R. Rangaswami of Sandhill.com, he said there were still too many VCs, and that the industry must come to terms with the fact that future returns on investments will be far lower than at traditional levels.
That means VCs have to tell investors in their funds to expect smaller gains. That's a tough sell, especially since the risk has not decreased. I could argue that the risk of failure for VC-backed startups has increased. . .(more on that in future posts).
While some VCs are twiddling their thumbs thinking about what to fund, they would do well to hire a PR agency to spruce up their image. Something along the lines of a benevolent "uncle" looking out for the best interests of their young charges might be an appropriate image to shoot for :-)
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Please also see SVW: That giant sucking sound...will massive tech companies vacuum up all the cool/hot tech companies?
By Tom Foremski - January 30, 2006 | Permalink | Comment
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Comments (5)
are you sure it was TDefren who pointed to VC Rick Segal's recent post?
;-)
Posted: January 30, 2006 9:32 AM
Ooops sorry! It was, of course the Penguin!
Posted: January 30, 2006 11:49 AM
Fear and Loathing in VC Land? Try a pleasure to hard to resist...
Sneers and roasting are abundant in the realm of http://www.sandhillslave.com
Rants on Life in VC through the eyes of an assistant.
Posted: February 1, 2006 2:32 PM
Here it is, Friday. I'm tired, no wants to do to real work except the people who make the servers go (they never get any rest). And then I read Slave Girl's blog on working for VCs. I must admit, when I got to what? feces? during an attempted VC pickup hit and run, I laughed out loud.
Thank you Slave Girl - you made my day! :-)
Posted: February 3, 2006 4:39 PM
Tom, interesting post. I think that the problem is due to three factors:
- Technology makes things cheaper and easier to do, so there isn't the requirement for capital that there once was in the IT and web sectors, though there still is in bio-tech. Why would someone who has bootstrapped a business together want to sell their dream on the cheap when the money isn't needed?
- There is an oversupply of money to be invested. This is because fund managers can't get enough returns from equities, property and hedge funds to pay for the increasing number of retirees drawing on their pensions into the future
- The financial imperative to invest, according to Bob Cringely's column for PBS.org some 25 billion USD of uninvested money is due to be handed back by venture capitalists to their investors in the next year to 18 months. If the funds are handed back the VCs have to also refund their two per cent annual managment fee, that equates to some three billion USD in lost fees. Bob reasons that they will invest in dogs and no hopers rather than do that. A massive injection into the mobile space may create the kind of bubble that is just what the doctor ordered for many technology companies.
The link to the Bob Cringely article is: http://www.pbs.org/cringely/pulpit/pulpit20050210.html
Posted: February 18, 2006 4:45 PM