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A panel of four venture capitalists at NGN 2003 vote to keep their jobs
November 5, 2003
BOSTON -- Is the venture capital (VC) model broken? Judging from a panel of experts here at the NGN 2003 show, it's not easy to get a straight answer -- especially when all of the panelists happen to be... VCs.
The panel -- entitled "The Broken VC Model: Where Will Innovation Come from?" -- included four partners at venture capital firms. All of them had short presentations that could be best described in the "Glass Half Full" style, as they all predicted the industry was on the verge of bouncing back.
Not surprisingly, they encountered some friction in the form of questions from the crowd and also from moderator John McQuillan, the chairman of the NGN conference, who happens to be an "ex-VC" himself, in his own words. (His portfolio once included Maple Optical Systems, RIP -- see Maple on the Money Trail and Headcount: Miller's Oranges).
"This gives me a chuckle... 'Where's the innovation in the VC World?' " asked McQuillan, reading from one of the question cards from the audience.
In their presentations, the panelists pointed out that from an investment perspective, there's no way to avoid ratcheting back company valuations and expectations after the bursting of the bubble, because the exit valuations are no longer high enough to justify investing large amounts of capital in startups.
"Hope is not a strategy," said Rod Randall, general partner at St. Paul Venture Capital. He pointed out that the numbers simply don't work at sky-high valuations, and they need to be scaled back. He implied that the trend of the "zero-pre-money" round, in which a company receives a valuation of essentially zero before receiving its venture money, could continue for an indefinite period. And he said the most viable strategy for startups is to create products that add incremental improvement to existing networks.
But there were those who said they were still swinging for the fences. The most optimistic of the panelists was Roland Van der Meer, a partner at ComVentures, who noted that "great companies are formed in bear markets."
Also weighing in on the more optimistic side was Dave Furneaux, a managing general partner at Kodiak Venture Partners, who said his firm has invested in "34 new companies in the last 48 months."
But McQuillan -- and the crowd as well -- appeared to buy into little of it.
."I think the VC model is broken," said McQuillan, "And innovation is now more likely to come out of research departments of large companies."
The panelists did appear to concur that venture capital is a competitive industry, and that there were far too many venture capitalists than was healthy. "If you look at mutual funds, only about 5 to 10 percent of them outperform the market," said Van Der Meer, "and I think you'll see the same thing in venture capital."
There are probably too many VCs," said McQuillan. "There are 8,000 VCs funding just 1,000 companies per year."
McQuillan also dredged up another ugly statistic: Over the last three years, the average return on venture capital portfolios has been about -25 percent.
"Some investors aren't asking for a return on capital, they're just asking for their capital to be returned," said McQuillan.
This, course, leads to the question of how many of those panelists will keep their jobs. They didn't look very worried.
— R. Scott Raynovich, US Editor, Light Reading
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