Global Themes

You know there’s a tech bubble when…

…the BBC makes it one of their top stories!

From the BBC story, “Inside the Silicon Valley tech bubble“…well written and entertaining, albeit with a sobering tone towards the end.

Below are some excerpts (emphasis mine):

“…Each month in San Francisco an audience of technology lovers, bloggers, journalists and potential investors gathers at the headquarters of technology news firm Cnet to hear four firms pitch their ideas.

Called the New Tech Meet Up, it is a networking event in which the “next big thing” in web developments meets the audience looking out for the hot new tip.

…In the audience is well-known west coast trend spotter Michael Tchong.

He tells the crowd: “There’s a huge amount of cash floating out there and it’s chasing too few good ideas.” This is what the audience wants to hear – that they don’t have to chase fortune with their plans, the money will chase them.

Across San Francisco and down into the Valley people believe the boom times – known as the bubble – are back.

…A year ago, the San Francisco New Tech Meet Up was eight people in a bar discussing technology; now there are more than 1,000 registered members.

…Mike Shroepfer, vice president of engineering for Firefox developers Mozilla, says the best way to work out if Silicon Valley is booming is to look at the traffic on Highway 101 which snakes down from San Francisco.

“If the traffic is a killer then you know times are good. “When the commute is pain free then that’s a signal that the bubble has burst.”

On that basis alone, times must be good in the Valley, for the journey on the 101 is painful indeed.

March 27th, 2007 Posted by Shantanu | Entrepreneurship, Venture Capital in US | 7 comments

“So you want to be a Venture Capitalist?”

On a tube ride back home – after a long day of meetings agonizing over investment decisions – I was reminded of Stewart Alsop’s quote about some VCs being in the “god category”.

I had read the story before but had only a vague recollection of where it had appeared and what the conclusion was.

Yesterday, a diligent search on the web revealed this gem: “So You Want to be a Venture Capitalist?”

You may have to register (free) to read the article in full but I would recommend it to everyone who is contemplating a career in this business – and to everyone who has spent more than a couple of years on the inside….

Some good quotes from the story:

The first one from one of NEA’s founding partners, Richard Kramlich, hinting at the selection criteria at his firm:
“Two-thirds of the partners who were at NEA in 1997 are no longer at the firm; the surviving third accounted for 85% of the firm’s profit”

John Doerr at Kleiner Perkins, “it takes probably six to eight years and you should be prepared for losses of about $20million…Of course, while we take risk, we work like hell to avoid crashes”…

And finally the “God quote” that was nagging me:
“I think I’ve done very well as a venture capitalist, but I’m not in the god category”, Mr Alsop said. He defines a venture god as someone who has made $100million to $500million on a single investment. His list of industry deities includes Mr Doerr, Mr Kramlich and Michael Moritz at Sequoia Capital…”

Sobering…

I don’t know how many such “gods” exist outside Silicon Valley…in Europe and in Asia…but I feel hugely privileged to work with one of them…

.

See also one of my earlier posts, “How to become a VC“

November 23rd, 2006 Posted by Shantanu | Venture Capital, Venture Capital in US, What VCs really do | 5 comments

What ails European Venture?

At the TechVenture Asia conference, I picked up these depressing statistics:

The data comes from Cambridge Associates who have also included their data from 2004 to get a sense of perspective:

From Cambridge Associates’ 2004 report: “In aggregate, the historical performance of private equity partnerships in Asia has been disappointing…Asia remains a region of greater potential than of actual opportunities for private equity investors, but that potential is gradually becoming more tangible, less will-o’-the-wisp and merits close attention in light of the regions dynamic growth prospects…”

Mean End-to-End Performance as of 31 March 2004*

Things have obviously come a long way since then for Asia…here are the updated performance figures for 2006:

Global VC Trends – Deloitte/NVCA Survey ‘06

Red Herring reported last week on Deloitte and Touche’s latest (2006) Global Venture Capital Survey with the headline “United States retains its edge in innovation, China and India remain top VC targets.”

It went on to say that, “Despite the opportunities presented by globalization, venture capitalists worldwide still view the United States as the world leader in innovation….This and other surprising findings were revealed Friday in the 2006 Global Venture Capital Survey…”

I dont understand why anyone should find this surprising.

On almost any measure of innovation (no. of scientists, engineers, technologists, patents filed, resources devoted to R&D, market demand for new technologies etc) the US is so far ahead of any other economy today, that I would have been surprised had it received less attention than what is mentioned in the Red Herring story.

The suprise would be when (and I believe it is really a question of “when” not “if”) its pole position comes under serious challenge – most likely from China and India, but quite possibly from Europe as well.

The article cited “returns” as one of the reasons why the US continues to be an attractive market for a lot of VCs (both homegrown and from abroad) – that certainly rings true – especially when you look at the anaemic performance in European venture

Which factors are driving globalization? “When it comes to the reasons that firms do plan to go global, firms around the world agree that low cost labor and an upswing in the number of quality entrepreneurs make places like China and India more attractive than ever. Whether firms are located inside or outside of the U.S., they seek to expand mainly into parts of the world that are as low cost, entrepreneurial and tapped into foreign markets as possible.”

The story also mentioned that:
. The U.S. leads the way in manufacturing, R&D, and engineering in the eyes of non-U.S. VCs

. China leads the way in manufacturing and India in R&D and Engineering in the eyes of U.S. VCs

- if true, this is very interesting – and I will try and dig into the survey to find why US and non-US VCs have such differing perceptions on manufacturing, R&D and engineering.

From Deloitte’s press release, I picked up some additional nuggets:

“U.S. venture capital respondents cited India as the number one country outside the U.S. where there is access to quality entrepreneurs. Conversely, they cited China as the number one country to get access to foreign markets.
…

In India, top impediments are: travel time and effort, lack of knowledge/expertise in the business environment and lack of experienced local investors.“

October 31st, 2006 Posted by Shantanu | China, Emerging Markets, Globalization, India, Venture Capital in US | no comments

Sevin Rosen, retreating armies and poisoned wells…

Came across Will Price’s response to Sevin Rosen’s recent decision to abort their latest fund-raising (Hat Tip: Arun Natarajan, Venture Intelligence India). Excerpts:

“I must say that I find it remarkable that a set of investors whose professional existence is predicated on funding disruption and innovation are publicly advocating that an end-state in the venture capital industry has been reached; that no viable models exist, no innovations exist, no disruptions exist that will allow people to rewrite the venture rule book and add value.

There are no end-states, but rather constantly changing constraints that demand adaptation to ensure survival in the brave new …

…The context today is quite clear – and commented on by me here – surplus capital, relatively poor IPO market, and too many venture firms/people.

In the face of stark constraints, the challenge is to define an intellectually credible strategy for creating value that incorporates today’s realities rather than ignores them.

…My read is that firms will need to go earlier to avoid the ugly exit realities, or they will go abroad to leverage growth markets.

…Life is disruptive and all business people – operators and investors – need to constantly question their strategies and demand an intellectually credible answer to how to best compete given the exogenous variables at work in any given industry.

…While I have great respect for Sevin Rosen’s track record, I am not quite sure why going on CNBC to discuss the “broken” industry is a good idea.”

Well said.

October 25th, 2006 Posted by Shantanu | Globalization, Venture Capital, Venture Capital in US | no comments

Beginning of The End for Venture Capital?

Since the summer of last year, I have been hearing news that something is not quiet right with Venture Capital – at least in the US context.

First you had Promod Haque at TiEcon 2005 saying that, “”Over the next five to ten years, I believe there are going to be half as many venture capital firms in this business, and there are going to be half as many companies being created”…his opinion on returns was even more pessimistic, “Over the next ten years, you’re going to get 30-year bond yields on venture capital investments”.

John Malloy of BlueRun Ventures, speaking at the same conference suggested that the main problem was not so much as oversupply of capital as concentration of it in Silicon Valley (or more broadly US)

But neither Promod nor John talked about getting out of Venture Capital.

However, Howard Anderson, Founder of Battery Ventures (and now the William Porter Distinguished Lecturer at MIT’s Sloan School of Management), actually penned an article in the Technology Review titled, “Good-Bye to Venture Capital”

Howard’s main contention (and the title of the piece he wrote) was: “Technology finance has turned rational — so I’m outta here”. In the article, he said: “…We venture capitalists like to think of ourselves as giants striding across the technology landscape, showering money on terrific young entrepreneurs, adding value, creating jobs, nurturing real companies. We are financial samurai.”

“But I am giving it up. Why?
First, technology supply is bloated. Innovation is not dead, but demand for new technologies is moribund and will continue to be weak for at least the next five years…
Second, there’s a good reason why technology spending is stagnant. The hype machine is broken… 
Third, the financial markets for technology companies are no longer exuberantly irrational…We need a little irrationality to earn a living — but the total capitalization for the leading technology companies is now one-sixth of what it was five years ago.
Fourth, these changes in venture funding are structural, not cyclical. VCs actually like cyclical markets; we can buy in cheaply and wait for exuberance to bail us out. …But those days are, regrettably, over.”

And he fondly remembers the good old days of Venture Capital:

“Ever wonder what we did for a living in early-stage venture funding? I bet you think we spent the day searching for the next insanely great company. But we spent most of our lives in endless meetings with people who were lying to us: scientists who swore that their patents were solid and entrepreneurs who insisted that they had no competition. We lied right back at them: said our money was different.

That was the old way, and it was tons of fun, and we all made too much money. I’ll miss it. But now the markets are too rational, and the returns are too small and uncertain. So, time to leave.”
Last week’s big news was of course Sevin Rosen. Steve Dow, one of the Partners was quoted in the New York Times as saying, “The traditional venture model seems to us to be broken” Sevin Rosen is no ordinary firm…Over its 25-year-old history, it has backed some of the best tech start-ups in the US and was raising money for its 10th (!) fund.

Sevin Rosen offered three main reasons behind this radical step:
• Too much capital
• Too many companies being financed and
• A weak exit environment

It also said that “The venture environment has changed so that overall returns for the entire industry are way too low and even the upper-quartile returns have dropped to insufficient levels.”

Had these words been uttered by anyone else, they would have been dismissed off as “excuses” for a difficult fund-raising or poor performance. In case of Sevin Rosen, neiither of this is true.

Although there have been instances of firms returning money to investors – most notably after the 2001 dotcom burst, I had not yet heard of an entire fund being being called off – especially when there is no trouble raising it…
What is going on? Is this the beginning of the end? Depends on who you ask and where you are talking.

At the EVCA last week, I sensed an unmistakeable mood of optimism…it even looks as if it might be the end of the nuclear winter for European VCs

Are things different in the US? Kliener Perkins, Hummer Winblad and others don’t think so..In fact, Mitchell Kertzman at Hummer Winblad thinks this is “one of the best times to be an early-stage investor”.

My feeling is that more than returning the fund, what Sevin Rosen really did was to buy time to think…think whether there is a new model that may work better, think whether there are new geographies that could be explored (Sevin Rosen is conspicuous by its absence in China or India), whether they need to move at the earlier stages of the venture cycle, work with affiliates, invest less in a larger number of companies or something entirely different.

I think most of us in this business (whether in the US/ Europe) would agree with Fred Wilson that the model that worked for the last 30 years will not work for the next 30..

So what needs to be done differently?

One thing is clear – firms, investee companies and investors themselves (VCs as well as LPS) need to think about their strategy for other parts of the world, Europe in case of US LPs and firms, Asia in case of everyone in Europe and US. Fred refers to it in his list of trends: “- the globalization of technology development and consumption”

Josh Jaffe also talked about Sevin Rosen’s decision in his post, “Sevin Rosen’s capitulation is not indicative of VC industry problems”

He summarises the situation neatly in his last paragraph: “Despite Sevin Rosen’s claims, there are few lessons from this fundraising failure that should be applied to the entire venture capital industry. This is about one firm’s inability to succeed without its founders. It’s about a firm’s unwillingness to believe in new technology movements such as the Internet. What it’s not about is the venture capital model being broken….”

I believe him…but I also think that the bar has just been raised a few notches higher.

October 16th, 2006 Posted by Shantanu | Venture Capital, Venture Capital in Europe, Venture Capital in US, What VCs really do | 2 comments