Problem with VCs – Their Back Teeth are Floating – Portfolio Backlog and Gridlock – An Opportunity for VCs July 1, 2008Posted by John in Technology.
Conversations on the blogs today about the plummeting of the VC market. TC has a good post with data. I won’t rehash their post – I agree with most of it. But I’ll add my take here in Silicon Valley.
My take: The big problem is lack of liquidity. My last company was venture backed in Silicon Valley. When there is no capital markets both on the public and M&A side I can tell you that things get crazy.
Most VCs don’t know what to do with portfolio companies after 3 years (even when they are performing ok) Their model is 3-5 year horizon. I would argue with the new environment that their investment time horizon is now limited to 3 years. If there is no exit after 3 years the number of investments a partner makes starts to backup – what I call “portfolio gridlock’. This means that they get “deal backlog’.
A venture partner is like a sales rep – they need new deals in their pipeline and to get the old ones out. No human can be on 9+ boards and be effective. So VC need to get rid of their old companies and make way for the new. It’s a problem screaming for a solution.
Here’s the problem in today’s market when there is no exit model. Most VC partners in Silicon Valley are so backed up their ‘back teeth are floating’. The other problem is that the VC model is all about building up more equity in the later years (control equity to prepare for the exit). So you have a venture capital firms with majority control and no time and energy to assist the companies. And now there is no exit.
I think that this is new ground for VCs and certainly challenging. However it’s an opportunity. There are some great companies out there who are building businesses. Problem is the VC are in control of most of them in a dead market for exits. The need of the VC is to unload these companies. In the current market just shutting them down or quietly selling them kills the entrepreneurial edge and jobs – a blow to the entreprenerial system. It’s an opportunity for new kind of investment firm one that services this macro trend.
Enterpreneurs need to be in charge for long term success. I wrote this on my blog about keeping the founder around.
The other issue is WAR both real war and the tech wars being fought out here.