| Is the VC Model Broken? A Majority of VC's say Yes. |
| Written by Gerry Langeler | |
| Monday, June 29, 2009 | |
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"The technology advances we've seen in the last decade or two just won't be repeated in the next." 1979? (Yes, again!) In fact a Business Week cover proclaimed VC dead then. 1993? (also Yes!) And then in 1994 Netscape went public and all hell broke loose for venture capital returns for the following 6 years or so. It is always tempting near the end of a down cycle to proclaim that this time it's different. This time, the market is never coming back. This time, it's broken. Certainly, there are some differences now - with the much larger dollars in VC, and the advent of troublesome regulations such as Sar-Box, and the current economic downturn. But, the fact there are differences doesn't mean it's different - just new. There are new challenges that will be overcome - because fundamentally the need for new discoveries goes on, and the need for risk capital to fund them continues on as well. The financial markets aren't always rational in the short-term, but long-term risk taking is rewarded for good ideas and teams. Those who now proclaim the model as broken may be right - but all their predecessors were flat wrong. My money is on them being wrong again.
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written by Kevin Rankin, July 22, 2009
VC was proclaimed dead back in 1979?
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written by William Carleton, July 25, 2009
Gerry, I've just discovered your blog and am very pleased to see it; looking forward to exploring further and following what you do here. Good for you and good luck with it.
Couple questions re this post: might "broken" mean "in need of fixing" and not necessarily dead? That is, are there factors (need for smaller amounts of capital, lack of a 'ponzi scheme' public market, focus earlier on sustainable vs. outsized businesses, etc.) that might argue for changes in the way that risk capital (which, I agree, there will always be a need for) is packaged and deployed? Is a model that presumes a certain size of capital must be deployed, and a certain exit goal must be obtained, necessarily the right one for the post-ponzi next-Internet economy? I realize that my perspective is probably skewed as I deal with software, IT and social media companies, and probably don't fully take into account what medical and other capital intensive ventures might need. report abuse
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... written by Gerry Langeler, July 28, 2009
Absolutely, broken can mean not dead - just in need of a mending process. In many ways, the mend can be back to the future, but that future being prior to 1999. In some spaces (but not all as you point out) capital intensity is down. Liquidity options for investors may not see the bubbly days of 1999 again, but VCs don't need to for success.
Here's a case in point, which will date me, I'm afraid. In 1984, the company I helped found went public. It did so off an $11M profitable quarter at a 30% compound quarter over quarter growth rate. 1984 was viewed (then) as a "HOT" IPO market. Translate that into current dollars and you'd see something like a $25M profitable quarter. So, today, if we had a company doing those kind of numbers, at that kind of growth rate, what would we have? We'd have investment bankers lined up to take it public at the first hint of an open IPO window. And (needless to say) this is NOT a hot IPO market. What's missing is a full adjustment out of 1999 thinking that still pervades many in our industry. If we as investors and our entrepreneurs build substantial, profitable sustainable businesses - the industry is not broken. It will have healed itself. report abuse
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"Invested in Venture Capital? You would have been better off in T-bills for the last 7-8 years."
