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Summary:

Big news over the weekend (that did not involve Google or You Tube) was that Sevin Rosen, one of the most respected names in the venture capital (the one that backed the likes of Compaq Computer) was not going to raise a new fund and would […]

Big news over the weekend (that did not involve Google or You Tube) was that Sevin Rosen, one of the most respected names in the venture capital (the one that backed the likes of Compaq Computer) was not going to raise a new fund and would return the money to limited partners.

Sevin Rosen is a big backer of wireless, telecom and broadband start-ups. I have had a chance to meet with both Steve Dow and Jon Bayless, and they were nothing but helpful when I was writing Broadbandits: Inside the $750 billion telecom heist. Sevin Rosen’s decision to return money to its investors is a reflection of tough times in telecom that still linger.

The rapid consolidation of carriers, equipment vendors and lack of public market interest in new telecom offerings is cascading down the food chain. Why, our good friend Dean Takahashi was lamenting about the tough times for chip startups in his report for the San Jose Mercury News. Ikanos, one of the few chip-hits is the latest to get hit hard, because VDSL market is slowing down in Asia.


The VC investments have started to flow in a different direction, primarily light weight Internet applications and Web 2.0 sector. This doesn’t mean that the world doesn’t need chips or networking gear; just not that much of it. Actually, a long time ago I wrote a post called, Did Silicon Valley Build its own 747?

The argument, first prompted by a spirited conversation with Drew Lanza (a GP at Morgenthaler) was that during the bubble 1.0, so much stuff got done, and so many ideas got commercialized that we have had to enter a phase of incremental improvements, and technologies that finesse the older technologies.

Sevin Rosen’s big hits came where there was massive industry disruption. Compaq in the PC era for example, or Ciena in the optical arena. The fund missed the Internet wave, and many of their telecom investments came long after the telecom bubble was in full swing. Market timing did not play in their favor.

Even now their portfolio is packed with telecom-related companies. Firefly, the kids mobile MVNO and MetroFi – are two examples of their consumer facing telecom investments, but rest of their portfolio is still packed with companies that are unlikely to find receptive audience in the public markets. The big buyers such as Cisco Systems and Broadcom have brought a sanity to their acquisition strategies, and are staying away from the big ticket buys.

Lack of exits is always a problem for venture capital fund, especially the one which has raised gobs of money. Limited partners start asking questions – tough questions. Of course there could be other issues – such as tension between the partners, or diverging interests – that can cause a fund to capitulate. Perhaps, that is why I take “VC model is broken” statement with a pinch of salt. It might have mutated a little, but broken? What do you think? Write back! For more views on this: Paul Kedrosky and Fred Wilson.

This post first appeared as part of GigaOM Weekly newsletter.

  1. if you can’t take the heat get out of the kitchen! nice to blame the model. ironic this comes out while they’ve been trying to raise a fund for the last 6 months

  2. you know something ? have you heard of Greater fool Theory (http://en.wikipedia.org/wiki/Theoryofthegreaterfool) .
    with all the due respect to out going veteran i would like to say that one reason for this over heating is the Trend of Exit by sell of not by revenue or IPO and reliability on advertisement as a de facto revenue stream .

    it seems World has run out of Enough fools . having an unregulated institution only Equity Exchange for pre IPO company can be a solution : )
    essentially thats what being done here only under the veil

  3. Maybe its time to realize that PE is not just about bailing out thru either trade sale or IPO routes… Smart Capital is the proper terminology for PE investments… you dont just get capital for expansion, growth… you get it along with a bunch of smart people (no matter how dumb they are!)

  4. Looks like Sevin Rosen might have tried to pull a snow job over on the NYT. Dan Primack is writing about it:

    http://texasvc.weblogswork.com/2006/10/14/dallas-vc-caught-in-snow-job/

  5. With this announcement and CRV’s move into angel investing this week, all signs are pointing to a definite shift in the traditional VC model.

    As with any shift, there are likely to be winners and losers:

    Winners:

    • The bluest of “blue-chip” VCs. The Sequoias and KPCBs of the world shine brighter when the maddening crowd is rushing to chase the latest trend of VC investing. They’ve been there and done that time-and-again.
    • Existing Angel Investors who have a track-record. When a space gets hot (i.e., angel investing), those who have been there for a while are the old wise men. Josh Kopelman, Jeff Clavier, and others will see a rise for their services even as others rush in. There will be a flight to quality.
    • Traditional VCs who are able to make the leap and really differentiate from other angel investors. Although CRV is a great firm, their success is not guaranteed. They need dealflow; their GPs needs to be seen as credible by non-nascent entrepreneurs; and they really need to be able to deliver value to their investments (beyond the simple “we love to roll up our shirtsleeves alongside our investee companies” platitudes).
    • 2nd and 3rd Time Entrepreneurs: They’re even more sought after following this news than they were before. We are heading for a Hollywood-type star system where Bill Nguyen announces his idea for his next start-up at lunch and the deal is done by dinner.

    Losers:

    • Stuck-in-the-middle VCs: Those VCs who do a little bit of angel investing and a little bit of traditional are likely to do neither well.
    • Former Great VCs who don’t adapt to changing times: Remember when Softbank was king of the hill? Hot VCs who have yet to reach the echelon of Sequoia and KPCB are not assured of long-term success. They are also likely to stick-to-what-they-(think-they-)know-best. Dangerous, when the rules of the game are changing
    • Later-stage/Mezzanine Investors: They just got even less relevant.

    Thanks,

    Eric

    http://breakoutperformance.blogspot.com/2006/11/are-angels-new-vcs.html

  6. Charles River Ventures Goes For Angel Market Friday, December 26, 2008

    [...] Venture capitalists investing in the consumer space have been having a tough time the last couple of years (with notable exceptions). Valuations are rising, many startups are getting to acquisition without raising venture capital at all, and many well-known VCs are simply calling it quits. [...]

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