Today the CEO of Yammer
argues thus (after having sold to Microsoft for $1.2bn, oddly enough). In essence he argues that its hard to:
(1) Find an idea that the Big Guys haven't thought of
(2) Prove it in the c $5m runway the SV VCs will give you these days
(3) If it takes off, keep it going long enough to grow before some major player swats it with a competitive play, patent suit or other or spoiling manoeuvre.
As you'd expect, some prominent SV VCs take issues with this, Marc Andreesen arguing that there is an infinite amount of creative talent out there and the big companies are ponderous and often not well run (this being the same Andreessen you recall who watched his own Netscape get crushed by a fairly inept Microsoft's Explorerer in the mid-nineties, of course....but then he made good on Skype. Maybe one forgets....)
We have wondered aloud about the End Of Silicon Valley in in the past, but have always noted its ability to resurrect itself. But today, as well as the above, three other different articles, on 3 different aspects of this issue, seem to be painting an emerging picture:
1. Firstly, the Old School VC's aren't making any money anymore - Business Insider
Last year, in an attempt to cash in on the late-stage "private IPO" investing frenzy, Kleiner startled the Valley by launching a $1 billion late-stage "Digital Growth Fund." Many saw this fund as Kleiner's attempt to play catch-up and associate the firm's name with hot companies it had missed. Some also saw the fund as a sign that Kleiner had lost not just its edge but its valuation discipline and predicted that the firm might get clobbered on some of its late-stage investments.
These concerns were well-founded.
Armed with a boatload of new cash, Kleiner rushed out and made late-stage investments in, among other companies, Facebook, Groupon, Zynga, and Twitter. In most of these investments, moreover, Kleiner did not buy stock from the company--thus providing additional growth capital for the company--but, instead, bought stock from existing investors, helping them cash out with huge gains.
Kleiner's investment in Twitter may yet pay off, but it has been far from a home run.
Twitter is unlikely to make up the numbers. Many of the older VC firms took big hits in the DotCom bust (I recall seeing a McKinsey report that said no investment after 1997 made money). KP has been widely felt to be off the pace for a few years, and this was seen by many observers as a last ditch attempt to get back in the game.
2. Secondly, even the New Boys are backing out of their new investments- WSJ
Some of the early backers of Groupon Inc, including Silicon Valley veteran Marc Andreessen, are heading for the exits, joining investors who have lost faith in companies that had been expected to drive a new Internet boom.
....
Shares of Facebook continued to slip last week, falling to about half their May IPO price, as sales restrictions expired for some pre-IPO investors. Since Zynga's December IPO, its shares have dropped 70% as investors worry about its ability to keep making money from people who play its digital games.
....
The Groupon investment flurry that ended in January 2011 was part of a recent Silicon Valley trend of prominent investors jumping into young companies shortly before their IPOs. Critics say the phenomenon builds unsustainable valuations for those young companies.
"Groupon would never have gotten this big without that late-stage money," said Bill Gurley, a general partner at venture-capital firm Benchmark Capital.
At least they got in earlier, but its not a viable model long term when the IPO money knows its going into an almost pump 'n dump scheme, so no surprises then that.....
3. Thirdly, the huge Californian Public Service pension fund (CalPERS), a stalwart VC funder over the decades, is considering pulling out of funding VCs - PE Hub.
The nation’s largest public pension fund, CalPERS, appears likely to slash its investments in venture capital in what could be a blow to this still recovering asset class. Venture capital has wallowed through nearly a decade of difficult returns and sluggish fundraising. The decision by the California Public Employees’ Retirement System to largely abandon new commitments to venture funds will likely prolong the agony.
......
Over the past decade, venture capital has been the worst performing asset class in CalPERS’ private equity portfolio. It has delivered a net return of 0.0%, according to June 30, 2012 pension fund data. Part of the poor performance stems from the continuing fallout from the dot-com bust, which saddled many venture funds with negative returns [See 1 above} . Performance was hurt again by the recent financial crisis, which had an impact on almost all asset classes.
In the past year or so, venture returns have improved as IPO activity has risen. Still, venture capital has fared poorly relative to other asset classes at CalPERS. Buyout funds, which represent 57% of CalPERS’s private-equity portfolio, have produced average annual returns of 15.4% over the past 10 years, while credit related investments, another big CalPERS investment focus, generated 14.1% annual returns.
Granted they only put about 6% of their c $240bn fund into VC, but that is a very big number for the VC community
Of course, if CalPers had just shorted the stocks of the companies their VC investments were funding, like the banks did, they would have made out like bandits -
WSJ again:
Profits made by banks underwriting Facebook Inc.'s initial public offering as the stock fell were distributed this past week from a pool of about $100 million, say people with knowledge of the deal.
The banks together made the money through a process known as stabilization, which is a standard procedure in IPOs, though Facebook's deal size made the profits larger than normal, these people said. The payout comes in a week that saw Facebook stock hit new lows, falling Thursday below $20 after an IPO price of $38 a share.
Thats on top of the c $175m they were paid to do the IPO. Easy when you know how.....but not good news for the whole VC ecosystem. Private profits, public (offering) debts....
