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.