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Funding for startups

VCs: 'We're Not Broken, Dammit!'

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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optical 12/4/2012 | 11:17:01 PM
re: VCs: 'We're Not Broken, Dammit!' In regards to VC's, I have to tell you based on my own personal experience that I'm not impressed with about 99% of them. I was always under the impression that a BOD was an group of people who where in a role to assist your company to be successful. Unfortumately, my experience has been one where I actually view the VC's to be destructive due to their true lack of unstanding of how telecom carriers operate, or it's a hot shot VC who made a killing with their own start up during the bubble days and now they believe they have all the answers, when in truth they were just at the right place at the right time...they were lucky! I really believe that a weeding out needs to occur in the VC space and let's get the true builders of companies back in the reins at the VC firms. I'd be intested in hearing the thoughts of those who have also interacted with the VC community over the past 4 years.
realdeal 12/4/2012 | 11:17:00 PM
re: VCs: 'We're Not Broken, Dammit!' said his firm has invested in "34 new companies in the last 48 months."

Now we know what keeps the VC's busy- it takes time to close down 34 new companies but I imagine this can be accomplished over the next 18 months.
joe_average 12/4/2012 | 11:17:00 PM
re: VCs: 'We're Not Broken, Dammit!' Optical hit it right in the bull's eye.

The BoD at my old start-up were incredibly unimpressive. The best one, from a black humour perspective, was a newly minted MBA who had zero experience in life much less Telecom.

Of course once the valutions started going down and the VCs owned the majority of the stock, they made the obvious (remember: black humour) choice: they made this puppy the CEO. You can guess the sad result - no more company although the CEO still is drawing a salary until absolutely all the money is gone. Amazing.

I am in total amazement that there hasn't been a blood-letting in the VC community.

dwdm2 12/4/2012 | 11:17:00 PM
re: VCs: 'We're Not Broken, Dammit!' 'Where's the innovation in the VC World?'

I am not sure if this is the right question to ask. Traditionally, VCs want to buy innovation with their check.
bw 12/4/2012 | 11:16:59 PM
re: VCs: 'We're Not Broken, Dammit!' The question is if the innovation that making impacts will come from start-ups backed by VC, or now will come from research dept of big corps. I think short term, start-ups are having difficult times to push technologies to fruition, but longer term, they will be back, just a matter of time work off the excesses. If history is of any guide, there is not the first time for bubbles to burst, and cause a lot of pain in the process..But come back they did..
dwdm2 12/4/2012 | 11:16:58 PM
re: VCs: 'We're Not Broken, Dammit!' "... weeding out needs to occur in the VC space and let's get the true builders of companies back in the reins at the VC firms."

Builder of comanies usually lack capital and VCs usually lack the skill to innovate new technology. Thats why these two often gets married to produce by complementing each other. In recent days it seems like VCs are telling what to innovate simply because they are writing the check.
Sisyphus 12/4/2012 | 11:16:57 PM
re: VCs: 'We're Not Broken, Dammit!' > .. research dept of big corps ..

Thoise who believe in big corporation "research" probably believe in unicorns, also. Big corporations have consolidated so brutally around legacy products that there is *very* little going in the way of new programs - most of them were killed off very quickly as the downturn began. I think it's totally wrong to expect any disruptive innovation out of large companies for now, you'll just see very slight evolutionary improvements to the product line.
Sisyphus 12/4/2012 | 11:16:57 PM
re: VCs: 'We're Not Broken, Dammit!'
Funny to see McQuillan and the other NGN folk acting so superior these days. They just know better, always, eh? He was actually hyping the loudest just a few years ago. Which makes his new -and the show's- conservative front all the more irritating, I think. I attended NGN for several years, and sometime during the conference last year decided my time was better spent elsewhere, packed up and left.

The NGN insiders complain about the lack of innovation whenever they get a chance, but organizes the conference around the same crusty old theorems, the same ideas and with the same people. How's that for innovation? At this point in time, they wouldn't know what's "next generation" even if it had a neon sign on it.

As to the theory that large companies are still funding large, innovative, capital intensive R&D... it is a joke, isn't it? Or do they really lead such a sheltered existence? Get out of the Olde Ivory Tower, really.

In a nutshell: it's NGN that's gone stale, not the networking world.
Sibylle 12/4/2012 | 11:16:56 PM
re: VCs: 'We're Not Broken, Dammit!' Yes we chappies have too many clueless VCs and yes we can send them over. Provided you also agree to accept our unmatched collection of politicians. For you troubles we will relieve you of your entire herd of relatively sane mad cows. Deal ?
=======================================
Had to laugh at this one... Here in Scotland and in the UK generally VCs are so thin on the ground that some have been heard to say "what's a VC?"..

If you US chappies think you have too many perhaps you'd like to send them over here :-)
alchemy 12/4/2012 | 11:16:56 PM
re: VCs: 'We're Not Broken, Dammit!' Thoise who believe in big corporation "research" probably believe in unicorns, also. Big corporations have consolidated so brutally around legacy products that there is *very* little going in the way of new programs - most of them were killed off very quickly as the downturn began.

Agreed. Big companies also no longer have inflated stock prices so the amount they're willing to pay to aquire new products. The 'innovation' from VCs is bound to be winding the clock back 15 years and insist that startup companies live frugally again. A VC isn't going to make any money if their portfolio companies spend their money like drunken sailors.
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