The big question today is whether Sevin Rosen’s decision to abort its tenth venture fund, and return the money committed to it by investors, is more indicative of company-specific problems or is part of a broader malaise afflicting the entire venture-capital industry.
The truth probably lies somewhere between those two positions. What Steve Dow, Sevin Rosen’s general partner, told the New York Times is true: The traditional venture model seems to be broken.
Specifically, Sevin Rosen cited too much venture capital chasing too few compelling deals and "a terribly weak exit environment," noting that technology IPOs in particular had become things of the past and that M&A exits in consolidating markets were not providing favorable valuations.
In a letter to its investors, Sevin Rosen made the following assessment:
While good returns from any given firm’s portfolio is (sic.) certainly a possibility, the statistics have clearly shifted in an unfavorable direction. 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. . . . If we really believe that there are fundamental structural problems in the venture industry, should we raise our fund and just hope that the problems will get better?
Clearly, as the article in the New York Times notes, Sevin Rosen reply to that question was a resounding no.
Many venture capitalists, I believe, have not recovered from the market’s bipolar disorder of recent years. The boom, followed by the inevitable but devastating bust, shattered the confidence of venture capitalists as well as of entrepreneurs. They all discovered, to their eternal dismay, that success depends as much as external factors and variables as on individual brilliance. When the crash came, they lost heart and resolve, and many have never bounced back.
Sevin Rosen appears to be one of the victims of that crisis of confidence. While a lot of what it says about the broken venture-capital industry is unquestionably true, the VC business might be more broken emotionally and psychologically than structurally. The concept of "venture," which inherently involves risk, seems to have gone missing in many venture-capital firms.
While markets dynamics and regulatory environments change, it is incumbent on venture-capital firms to adapt to new circumstances. Fred Wilson of Union Square Ventures provides a trenchant analysis not only of Sevin Rosen’s decision to abandon its tenth fund, but also explains how his firm has adapted to the changing market and regulatory environments.
For his part, Paul Kedrosky takes an ambivalent stand, noting that while Sevin Rosen has strayed a long way from its glory days, venture-capital nonetheless "does feel broken."
If VCs are waiting for the return of the late 90s, they should call it quits right now and save themselves a lot of anguish and pain while saving us from having to listen to their self-piteous moaning. We all should realize by now that information technology — hardware, software, networking, applications, all of it — has matured considerably, and that becoming a successful startup, one with a lucrative exit, has become far more difficult than in years past.
Nonetheless, that’s not to say it can’t be done, as Internet-based service firms MySpace, YouTube, and Facebook, among others, are proving. And that’s not to say other emerging technologies — renewable energy, nanotechnology-based new materials and medical technologies — won’t emerge to pick up the slack.
Some VCs will not be prepared to meet the new challenges, but others will.