The venture capital industry needs bubbles in order to continue exist.
It’s almost like the US and the Soviets in the Cold War. Each side needed an enemy to rally its people around a common cause.
Why you ask do the well-heeled gentlemen around me on Sand Hill Rd need bubbles?
Simple. They need to have something to talk about with the poor bastards at the Danish Fireman’s Pension when they head out to raise their next fund.
Without a bubble, 99% of VCs have no returns or carried interest distributions since 1998 vintage funds to talk about. Even those in the mythical “top quartile” of VCs haven’t returned capital to LPs since vintage 1998. Supposedly 10-12 firms in all of venture capital have been profitable to the LPs since 2000.
So, without returns to talk about, most VCs steal a page out of the dot-com bubble public CEO playbook: If you have no revenues, profits, or progress to speak of, you must distract them. So talk about something else…anything else.
Back in the dot-com era public companies, you could count on a “transformative” acquisition being announced on or just before an earnings call to distract the analysts and the stooges who owned those stocks.
In 2011, the topic that every VC is talking about is the 4 or 5 companies that are expected to generate the bulk of VC returns for vintages 2004 – 2010.
Not surprisingly, the scuttlebutt amongst even the smarter LPs in the venture asset class is actually helping to feed this bubble. The LPs themselves are even saying that they expect 5 companies to generate most of the outsized returns.
So the race is on to see how many dollars can be invested in Twitter, Zynga, Groupon, and Facebook – at any price. The Valley mantra now is that price doesnt matter as long as you can put the company in your boilerplate and the logo on your website. The hoodie wearing senior citizens at Kleiner have reinforced this with their recent behavior. Except the billionaires who work at 2750 Sand Hill Rd can afford to do things like putting 50% of a fund into early stage cleantech or to invest in Facebook at $50B+ valuation. It’s as if they just don’t care…even if this new strategy goes totally wrong, they are still Kleiner Perkins, god-dammit.
The bigger problem is that while the VCs who invested early in these few companies will do very very well, the other 500-600 active US venture funds who aren’t in those deals or wouldn’t recognize Dick Costolo if they saw him at Starbucks are screwed. These are the Have Nots.
The Haves are raising huge funds – often north of $1B. They are appropriately leveraging their investments in the hot 4 or 5 companies *before* those investments are actually realized and are raising new mega-funds.
The Have Nots will try in futility to do the same thing. Except the Have Nots are totally fucked.
The Have Nots will be stuck with ever dwindling fund sizes, a perception that they missed the boat on the best deals of the last decade, and the reality that they are stuck in an asset class that has had a negative realized mean IRR (at least in software and internet) for the past decade.
I for one am happy about this. Let’s pray that the Have Nots just wither away.
They have grown fat and happy on their management fees. They have partners who were lucky dot-com 1.0 beneficiaries who now make $3M – $5M per year on profits from management fees and might work 50% time in a busy month while tending to their vacation homes and expensive hobbies.
Creative destruction is a good thing. That’s why I am praying that the poor guys at the Danish Fireman’s Pension see through the bullshit they are being fed by the Have Nots and realize that venture has become a shitty asset class and will remain so UNTIL the Have Nots who make millions per year on fees are forced out of the business.
Then, and only then, can new emerging managers with new investment styles step forward and fill the gap. That will make room for the young and hungry generation of 30-45 year old VCs who weren’t around from 1996 to 2000. Those who dont own the management companies today. Those who will remake the venture business.
If the Danish Firemen don’t get that the jig is up with the Have Nots and still need to park their alternative allocation somewhere, then we’re just all waiting for old partners now in their 50s and 60s to die off….and it’s a race to see if they die first or fund sizes shrink first and the younger partners all get fired before they have a chance to prove themselves.