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" I am firm in my belief than anyone not only can be rich but ought to be rich." -- John Jakob Raskob, August 1929 Is the credit crisis-fueled populist outrage heaped on Wall Street bankers starting to veer toward another class of financier--venture capitalists? A warning issued last week by blue-chip VC firm Sequoia Capital to its portfolio companies about the urgency of preparing for what many expect to be a severe economic downturn provoked cries of hypocrisy from tech bloggers. "It's kind of like Washington politicians who handed out-of-control bankers one deregulation after another in exchange for campaign donations now mounting their high horses and decrying Wall Street greed in the current economic meltdown," says BoomTown's Kara Swisher. "And yet, just like that, Silicon Valley's investors--who could spin you all the way to next Sunday about how Facebook was actually worth $15 billion, despite not having much revenue quite yet--are turning into penny-pinching accountant types." Such comments, and the ensuing brouhaha over Sequoia's call to arms, are prompting prominent VCs to circle like water buffalo. "I've detected a bit of irritation, and even cynicism about the motives
of Sequoia, Benchmark, Ron Conway and others (including me perhaps) in
the venture capital business who have been publicly and privately
advising their portfolio companies and entrepreneurs everywhere to be
cautious in light of the market meltdown and the potential for a long
recession," says Fred Wilson of Union Square Ventures, citing other notable investors sounding the economic alarm, in a Friday post titled "Don't shoot the messenger." Alan Patricof, founder of GreyCroft Partners LLC and a dean of American venture capital, also recently sought to defuse concerns about the possibility of a coming drought in funding for tech startups, telling us in a statement on Friday that it "is our strong belief that we can and will continue to make sound investments in excellent opportunities." It's clear why VCs want to distance themselves from their investment banking cousins (don't even mention the barbarians of private equity). From the day traders started milling around that buttonwood tree in lower Manhattan a couple hundred years ago, their fellow Americans, weaned on the notion of making an honest buck from honest labor, have struggled with the moral hazards of financial speculation. Calvinist restraint has always mixed uneasily with the kind of bumptious individualism required to make a mint. Those schizoid tendencies spew out with every bust, whether as Jacksonian attacks on "stockjobbers," Progressivist conspiracy-mongering or post-Enron corporate scalping parties.Venture capital, in part because it emerged only after World War II, has mostly escaped this historical taint. Yes, venture investment tumbled after the stock market crashed in 1974. But the VC firms that had recently set up shop on Sand Hill Road, such as Sequoia and Kleiner, Perkins, Caufield & Byers, were soon back in action helping to set the stage for the computer revolution. Similarly, when billions of dollars in market value burned up in the dot-com crash of 2000, no lynch mobs pursued the VCs who had fed the frenzy (Sequoia, it's worth noting, was an investor in some of the era's biggest bombs, such as Webvan Group Inc. and eToys Inc.) Indeed, many of those same investors today retain their reputations as prophets of technological change. That said, there's another reason--a good one--why VCs haven't drawn as much fire as bankers over the years: They have an alibi. Since Georges Doriot got the balling rolling in 1946, the venture business has remained a straightforward proposition. Invest long-term and earn a return for your limited partners. There have been structural changes, mostly involving VCs edging out of early-stage investment to focus on big bang later-stage deals. But, despite the temptation of having oodles of capital to play with, venture investors have generally avoided the sort of financial adventurism common to Wall Streeters. Except, of course, in one important respect. And that's where VCs are implicated in the current state of affairs. Many of those same LPs that fattened venture funds are the same pension funds, endowments and other institutions that levered up, piled into hedge and private equity funds, and otherwise made a big problem even bigger. In turn, venture capitalists in recent years have plowed much of that money into Web 2.0 companies, such as YouTube and Facebook, that are hissing air now that the economic crunch is affecting online advertising. Yes, it's that dreaded "B" word again. Bubbles have a particular resonance in Silicon Valley, which is by nature constantly on the boil. Speculating on technology is a different sport than speculating on, say, credit default swaps. But for a public eager for scapegoats, if things get worse it may just be close enough. -- Alain Sherter See Oct. 10 post on Sequoia Capital from Tech Confidential
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That is very true, no one ever mentions eToys, just that these are the guys who invested in Google and YouTube, and where would be YouTube today if Google did not buy it