Some insight from a couple of leading VCs

1) Tim Draper’s Rose Colored Glasses. Tim thinks “the next eight to ten years are going to be the greatest venture capital years in the history of the world”.

He has an interesting perspective on international investing. Having done startups in places like Africa, I also think there are incredible opportunities outside of Silicon Valley but as an investor you need the local firm infrastructure to be able to identify and work with the best. My hats off to Tim who has built a great firm that has reached out to the far corners of the globe using a model of a network local funds.

Incidentally, Tim agreed to seed the first startup I did with Monique Maddy providing wireless telecommunications services in Africa, which sold in 2007 for $160M to Zain Telecom. This was back in 1994 and Tim truly was a visionary. Although we wanted Tim as an investor, we could not agree to giving up 20% of the company for $50K!

2) Venture Capital Elders Say Think Small: Alan Patricoff left the large VC firm he co-founded, Apax, in 2004 to start Greycroft, a $75M fund doing investments <$3M.

He says:

“I personally believe and I think the evidence proves that the venture industry has gotten too big, the funds have gotten too big,” he said. In order to invest their enormous amounts of capital, venture capitalists end up choosing companies that are not sufficiently disciplined or capital-efficient, he said. And because firms have invested so much money, they depend on taking their portfolio companies public to get great enough returns, at a time when I.P.O.s are few and far between.”

Couldn’t agree more, although Alan is now raising Greycroft II which is rumored to be $125-150M in size. Perhaps a bit of a departure from the model he so dearly likes to speak about?

Although this pre-dated the conference, here is another article on Patricof’s model. Particularly relevant:

“The paradigm has changed for the venture business. We can no longer realistically expect the same kinds of absolute returns that were achieved in the past through a quick turnaround from start-up to liquidity through an I.P.O. Rather, I believe that most of the companies that venture capitalists are funding today will find an exit through merger or acquisition. And if we expect to achieve a return in a reasonable time frame of three to five years, we are probably looking at a sale price of $20 million to $100 million. This is the valuation range where most young companies are being acquired.”

Exit flexibility is one of the most important elements of your capital strategy and why we advocate so strongly that less is better. The less you can take, the more of the company you as an entrepreneur retain and the more attractive it is to exit for you. Similarly, your investors also benefit from a lower capitalized valuation and will be more inclined to want to exit with you as that will result in a good return.

3) With Industry in Doldrums, LPs and GPs Locked in Uneasy Alliance: This post sums up some of the problems plaguing the VC industry, in case you are wondering what is happening in our world. Back to Alan’s views, which we share, that smaller is better and has the potential to generate better returns in today’s exit market.

This entry was posted on Friday, June 5th, 2009 at 10:31 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.