VC Industry


In the first post in this three part series I described why I believe the VC market froze between September 2008 – April 2009.  In the second post I argued that as of September 2009 the pace of VC investments has increased rapidly (at least for software / Internet investments – the only sector on which I’m competent to comment), but only for those remaining VCs who have new enough funds and aren’t plagued by “the triage problem.”  This is a direct result of innovation around the iPhone / mobile computing, Facebook / Social Networks and Twitter (as distinct from Social Networks).  It is also a result of pent-up demand.

In the following post I argue that this increased pace may be temporary.  I obviously don’t have a crystal ball so the economy could fare better than my gut, but here’s why I’m cautious for some time in 2010 or early 2011:

Why is the future still so unpredictable?

1. Consumer spending is 70% of the economy and will continue to be stretched – We can look all we want at tech innovation, VC funding cycles and hot M&A deals, but ultimately growth and therefore investment must be underpinned by revenue.  This is tied to having consumers who feel confident enough to spend.  It affects even B2B companies because ultimately most must sell to companies who sell to consumers and if they suffer they cut back on suppliers.

Consumer spending is where I’m dubious.  I believe that consumer spending over the past 15 years has been fueled by a great run up in the equity value of property that gave consumers what economists call “

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In my previous post, The VC Ice Age is Thawing (for now) I wrote about the reasons why the VC market came to a screeching halt in September 2008 and remained largely shut until at least April 2009.  There are now signs the VC market has gathered pace meaning it’s a great time to be fund raising.  This post highlights some of the reasons why the market is moving again and what entrepreneurs should do about this.

There’s no doubt (at least anecdotally) that the pace of VC investments in early-stage technology companies has picked up in the past few months.   The real irony of the market thaw is that the biggest symbol of the freeze as I mentioned in my last post is when Sequoia released its famous “RIP Good Times” PowerPoint deck alerting companies to dark days ahead and

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When venture capitalists scale back investing activities it can be very swift and leave many companies that are in the process of fund raising hung out to dry.  Just ask anybody who was trying to close funding the fateful week of September 11, 2001 or even March 2000.  I would argue that the shut-down of September 2008 was equally severe yet there are signs that this “VC Ice Age” has begun to thaw.

But any entrepreneurs raising capital should keep in mind that this opening of the markets could possibly be temporary.  They should heed the age old advice that raising slightly more money while you can is always better than trying to optimize future valuations.  This should not be confused with raising too much money as many companies did in 2006-08.

The rest of this post series deals with the reasons why VC froze up in the first place, why investments have heated up recently and why the future of VC funding at the current pace is not certain.

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This is part of my ongoing series “Start Up Advice” but I’d really like to call this post, “VC Advice.”

If a company has reached a level of success, has been around for a few years and you believe the company has potential to break out into a much bigger company then you should let the founders take money off of the table.  It’s that simple.  Only then are you truly aligned.

Not FU money, but “feed the family” money.  And to be clear – I believe it is also in the VC’s interests.  I’m not trying to open Pandora’s Box and suggest all founders should be able to cash out – far from it.  But the handful who are building something of substance need to be able to take the pressure off in a way that creates a similar objective to the VC.

I think too many VCs simply don’t understand this.

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What We Must Learn from Asia


Posted on Aug 11, 2009 | 11 comments

I run a monthly meeting called the VCA that represents the majority of Southern California venture capital firms.  My goal is to bring in informative speakers who stretch our collectively thinking on topics that will influence our investment strategies and use it as a way for us to share our experiences in ways that I hope benefit the Southern California technology ecosystem.

In the past 6 months we’ve heard from Dmitry Shapiro on the future of online video, Ian Rogers on the future music model, David Sacks on the future of social networking and Michael Crandell on where Cloud Computing is headed.

All have been fascinating.  This month’s presentation was truly mind boggling so I wanted to be sure to share the entire presentation with all of you.  This was one of the most fascinating presentations I’ve seen in a long time and a must read – although you’ll see clearly better in person with commentary.  Benjamin Joffe (the author), a Frenchman who runs a consultancy in China that tries to help non-Asian investors understand the innovation occurring in Asia as a way to bring ideas to their local markets.  He also consults companies in Asia.

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Is VC too Fat and Happy?


Posted on Jul 8, 2009 | 44 comments

Much criticism has come of our industry in the past few months and in my opinion much of it is deserved (but I’m definitely a believer in the meme that VC isn’t broken but some of the participants are (see here, here and here)). But the VC industry is too fat – a thoughtful piece by Paul Kedrosky on shrinking the industry by half is here.

The latest to weigh in was the NY Times with this well written piece in yesterday’s paper.  I think it propely captures the moment and questions whether the structure of the industry for the past 10 years is the the right one for the next 10.  In my opinion it also makes Tim Draper truly seem out of touch … we need more VC money to “spread the wealth to the seven billion creative minds out there.” Really? WTF?  I’m prefer to assume he was quoted out of context since I’m told Tim isn’t a bad guy.  (UPDATE: Great response from Bill Bryant of DFJ is

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