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Silly question: Aren't the folks charged with identifying the technologies of tomorrow supposed to anticipate trends--in the valuations of startups, say--rather than respond to them? Fine, the worst of the financial crisis (so far) didn't roll in until after the third quarter had officially ended on Sept. 30, but things were already getting dire. To read that VCs were discouraged in the third quarter, but optimistic just one quarter earlier raises questions about VCs' vaunted powers of prognostication. Clearly, from individual homebuyers who took on risky loans, to the heads of all the country's top investment banks who insisted that this was a storm that we could all weather, there's no shortage of blame to go around when it comes to failing to see the writing on the wall before it was too late. But when VCs start reacting to an existing economic condition, rather than reading the tea leaves about what's to come, something's wrong. Everyone in VC circles knows there's a longstanding debate about whether venture investors are primarily check writers or offer the kind of insight and wisdom that money can't buy. At times like this, it looks like the former, although the real answer lies somewhere on the Bell curve. Good VCs, as in most domains a small minority, saw the economic writing on the wall and started taking evasive maneuvers a while ago; middling ones are just getting up to speed; and the dregs will no doubt take it on the chin when they wake up from their naps. Hey, sounds like the financial media! The other problem with putting the brakes on investing when the economy is in the toilet is that it seems incredibly short-sighted for an industry that should be used to waiting years for returns on investments. Comparisons to the tech downturn at the start of the decade only go so far, or course, but one thing we did learn from that period is that innovation didn't cease and money-making opportunities didn't disappear just because the industry had slumped. Many of the best Web 2.0 companies of today were born in the wreckage of the dot-com bust. The people who made money from those companies weren't the ones sitting on the sidelines predicting doom. --Andrea Orr See more on eroding confidence in Silicon Valley
Comments
From: just.a.guy,
As a VC myself, here's my idea of why this might be true. Venture Capitalists typically come from fancy pedigree backgrounds, with lots of undergraduate, graduate, and MBA degrees from fancy schools. Those same schools also send lots and lots of people to Wall Street, and these are more often than not friends and peers of the VC crowd. VCs do not get PhD's in economics or look at macroeconomic trends at all (except in rare cases). They often will discuss these issues with their peers (such as folks at Wall Street banks and hedge funds), and for years, their peers have been high on crack (oh, and they don't generally understand macroeconomics either). Add to this the fact that before 1991, the venture capital business was investing about $3BB a year. By 1999 it was as large as ~$120BB or so. In 2007 it was down to say $25-30BB. Point being, that probably 90+% of all dollars put to work as "venture capital" in the sense we know it today was put to work AFTER 1990. Add to this the fact that the average general partner at a venture capital firm is probably 40 years old? maybe 45 or 50 at a venerable firm. What you get is a group of very bright people who understand their niche pretty well, but who get broader economic prospective from idiots on wall street (blind leading blind), and who have never actually seen a REAL downturn in the economy. Given their educational backgrounds, they probably haven't ever closely studied a real economic downturn either. So it's unfair to look on in astonishment at venture capitalists and think that they should have seen this coming. They're smart, but they're smart about, and focused on, different things.
Posted on:
October 15, 2008 8:42 PM
From: Andrea,
Like I said in my post, VCs are by no means alone. Not a lot of journalists saw this coming either. :) The larger point I was trying to make, though, is that to limit investing just when an economic crisis strikes does seem odd, if for no other reason than that most of the startups seeking VC funds will take a long time to hatch. Even if you can't predict the exact timing of an economic crisis, you can, when you're in the middle of one, continue to be forward looking and consider the opportunities today's startups will have tomorrow. History has shown that it's often unwise to throw money into early-stage companies at a time when the IPO for later-stage companies is booming, and the same might be said for curtailing spending in times drought.
Posted on:
October 16, 2008 9:53 AM
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Ive yet to see the day a VC guy looks into his Tea for direction on a placement. Hopefully, you who wrote this article are well aware that taking companies public was/is a desired exit. THAT DYNAMIC is seriously hampered in this climate. Put plainly. If our investors are loosing their shirts in the real estate market, the stock market and in their primary golden goose, they re less likely to invest in any fund VC or not. VC is job. Assuming that all shops are made of money is ignorance. We fight to survive just any other profession. We provide life blood to that which would otherwise go un noticed. We make money not by reading tea leaves but by believing before others. Period...