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Problem with VCs – Their Back Teeth are Floating – Portfolio Backlog and Gridlock – An Opportunity for VCs July 1, 2008

Posted by John in Technology.
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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.

An Opportunity
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.

Comments»

1. Phil Gomes - July 1, 2008

The post about keeping the founder around strikes me oddly after reading the biography of Wm. Shockley. Imagine what Silicon Valley would be like if he actually *knew* what to do with all of that talent!

2. Alan Wilensky - July 1, 2008

What about industrial and technical specialty markets that have desperately called for new and updated vertical mobile apps that can serve and aggregate independent services? They have been solidly surveyed and willing to pay decent monthly fees, they number in the millions, yet the entrepreneurs that wish to raise the capex to get the ventures out of mezzanine mode can’t get a dime.

Some of the businesses have models that are utterly realistic, with recurring revenues of 10’s of M. Better than any ROI on any index fund.

It’s almost like the requirement for raising capital has been that you need a non-business model, whereas real, blue-collar businesses that could use mobile apps, would pay for them, can’t get a listen, because you need an attention span to (20-30 minutes and the ability to read a briefing) to grasp the mechanics of the industries.

Such a requirement is quite obviously beyond today’s VC’s (on Sandhill), but Superpoke and YASN are all the rage.

3. John Furrier - July 1, 2008

Phil,
I’m referring to keeping the founders at the stage where there is no liquidity. Meaning the founder provide that edge to getting things done. Forming a team, doing deals, building products. The playbook to take out the founder is an outdated move by the VCs. The modern VCs keep the founders til the venture has proven to be only an operational exercise with occasional strategy sprinkled in here or there.

4. Luca Rigazio - July 9, 2008

Alan,

what kind of industrial / vertical mobile apps you are referring to?
I guess industrial is considered “boring” in sandhill, so that’s why they dont get funding… maybe that’s a market for some smart big player (i know smart & big often don’t go together).

5. John Furrier - July 9, 2008

Luca,
Not sure what you are referring to I didn’t mention industrial vertical mobile apps.. personally i see vertical mobile apps as a big deal. To me the best opportunities are the ones not on the VCs radar.

I expect google to redefine the landscape with a andriod settop box tied to android phone code.. I’m watching google because they are moving down a good path to change the paradigm.

6. New Movie in Silicon Valley - Now Playing - Scared Straight (Profitable) « Furrier.org - Business & Technology Blog - October 13, 2008

[…] In a recent post a while back I mentioned that the VCs are backed up with deals – ‘VCs Back Te…. This is a new era – a new reality. I think we’ll see new investments but not like the past three years. […]

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[…] the private market is backed up on the VC front- I posted another story on that in July 2008 – “Problem with VCs – Their Back Teeth are Floating – Portfolio Backlog and Gridlock – An Opportunity for […]


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