The “Crisis” In Venture Capital - TechCrunch

Summary:
TechCrunch article summarising latest NVCA report (no IPOs in Q2 08). Some interesting comments. Most commentors blame the VC crisis on irresponsible VC investing in internet startups rather than the problems in the financial sector (Web2.0 companies with fake revenue forecasts; startup founders running away with the money; VC and internet are a bad mix). Many VC s are also believed to be ignorant about the technologies they are investing in (e.g. cleantech, energy). Other commentors blame it on a mixture of poor VC investing and loose credit markets. Several commentors believe there will be a flight to quality investments that take 4-6 years to build. The downturn could be a good time to invest, given that it may take 4-6 years before the markets have recovered. "Loose money creates waste and inefficiency and encourages stupidity. When money is dear, innovation really blossoms." (Published: 02/07/08)

Notes:

Comments

• blaming the VCs, startups, Web2.0
  
• "investing lotto style in all these web 2.0 businesses with fake revenue forecasts right"
• "All you have to do is look at the stupid crap companies (like Twitter) that are getting attention and the solution is clear."
• "Venture Capitalists and the Internet is just a bad mix"
• "The reason banks won’t invest risk capital into startups is because some people start LLCs or corps to shield themselves, then they get lots of capital and lose it. Here is an example since we are on the subject of TC being pushed into the deadpool. I dunno whether it will or not, but here is some history.
• “Edgeio recieved $1.5 million in angel funds from the likes of Louis Monier, Frank Caufield, the RSS Investors Fund, Jeff Clavier, Ron Conway, Michael Tanne, and others. $5 million in Series A financing followed in October of 2006.” So 6.5 Million, then the total of their assets gets sold at an undignified auction for $280,000
• The bank knows this, and they’re like “where did the 6.22 million go?” There is no answer. It disappears into the abyss of web 2.0. An accounting mess of weird and flashy expenses."

• "Hopefully this will generate a flight to quality among entrepreneurs. I’m sick of conferences where slick haired guys in t-shirts sit on a stage and talk about how the way of the future is their app that lets you throw a facebook fish at a myspace user. The world may be desperate for an app that lets you view a twitter feed on an android phone, but its not so desperate that it will pay for it. I hope people start looking for real problems to solve, rather than sitting in starbucks saying “wouldn’t it be cool if . . .” Maybe if the VCs stop funding cool, and start funding useful, that will happen."

• "Anybody who thinks that the “crisis” in venture capital is due primarily to the credit crunch doesn’t know what he’s talking about. The credit crunch and SOX aren’t helping VCs but the “crisis” is due to the fact that far too much VC money has been invested in startups that don’t interest anyone on Wall Street anyway because they aren’t real businesses. Apparently VCs didn’t get the memo: the .com boom was an anomaly in the IPO market and it isn’t likely to happen again anytime soon (we’ve moved on to creating other bubbles). VCs hoping that cleantech is the answer are in for more disappointment. I work for a hedge fund and over 25% of our investments are in the energy sector. We looked at several investments in cleantech startups that had raised VC money in earlier rounds and the VCs I talked with were clueless. They had no understanding of the energy business and looked dumbfounded when we told them that they had probably invested in a startup with an interesting technology that probably isn’t going to be commercially scalable. Bottom line: VCs are in “crisis” because most of them are clueless tools who couldn’t even run a dry cleaners."

• blaming the financial sector
  
• "The global liquidity crunch is very real. Look at the market caps of our largest banks: In the past year, Citibank has fallen from $52/share to $17/share today, Bank of America has fallen from $54/share to $24/share. It is inevitable that the crunch impact valley firms."
• blaming a combination of both
• "Loose credit markets result in liquidity events that are often irrational, yielding a poor return on investment. The combination of poor investment decisions by VCs combined with easy credit has resulted in limited liquidity events or “exits”."
• "This is a result of the continuing fallout from the extreme dot com boom/bust cycle of 1999 - 2003. The investment world (and regulatory system) has never really recovered from its skepticism about new, “IPO-ready” technology companies as a whole, regardless of individual success stories, so when other factors (credit crisis, economic uncertainty) increase the risk premium, the memory of being burned and scarred by tech companies is still vivid, and investors flee to quality, or sit on their hands."
• blaming Sarbanes-Oxley
• "I’d really like to see a more detailed investigation on Sarbanes-Oxley: Is it likely to be repealed? Is it likely to be relaxed? What do the two presidential candidates think about? What’s the consensus on SOX in the senate / congress? The negative effects of Sarbanes-Oxley on the economy are hard to overstate. I’d like to understand the chances of an improvement."
• Prospects for the industry
  
• "Cleantech investments may reflect the development cycle of a medical device company (so 5-7 years before an exit). Internet companies may not have any meaningful exits as there aren’t a whole lot of interesting players at the moment that are worth acquiring for any meaningful valuation (say > $250 Million). So I think we’re seeing a lull between the shift of investment into a heavier-load of long-cycle investments."
• "There’s typically a flight to quality in this type of scenario. If your startup is top 5-10% for whatever reason, the competition to invest in you will likely continue to be extremely fierce - maybe even more so. For everyone else however, I wouldn’t be surprised to hear that “the books are closed right now”."
• "There are several fundamentals to building a business that VC’s should seek in their investments, but don’t value much anymore. Particularly:
1. A clear business model
2. A scalable plan for growth with defensible intellectual property
3. Preexisting “sweat equity” by founders
• These fundamentals are severely lacking in most VC investments today, but they are the ones which result in business liquidity over the long term.
  
• Loose credit markets result in liquidity events that are often irrational, yielding a poor return on investment.
  
• The combination of poor investment decisions by VCs combined with easy credit has resulted in limited liquidity events or “exits”."
• "The Recession is going to be one hell of a mess. I view it as an opportunity. Loose money creates waste and inefficiency and encourages stupidity. When money is dear, innovation really blossoms. The Depression was a fruitful time to start a company. High gas prices are going to launch the next GM, I guarantee it."
• "The best time to invest is during economic downturns… not during the upswing. It is amazing how few investors get that given that this trend has played out over and over again over the past century. This is especially true for VCs who need to wait 4-6 years before the companies they invest in have a chance to exit."