August 11th, 2009
Are Silicon Valley VCs killing innovation?
There is a growing imbalance in terms of the risk/reward ratio between venture capital firms and entrepreneurs. And the current economic situation is making things worse.
Very little funding is happening. VC firms do have funds but they are focused on trying to keep portfolio companies alive. And any new rounds of financing are happening at valuations that favor the VC over the entrepreneur. The VCs are squeezing the entrepreneurs.
One entrepreneur raising funds told me, “It’s ridiculous what the investors want, it’s like getting raped.”
Georges van Hoegaerden, a serial entrepreneur, is a long-time critic of VCs in Silicon Valley. He says that few have the entrepreneurial experience to do the job well and they over-reward themselves for taking risks that their startups take.
In a recent article, he writes that “The Silicon Valley emperor has no clothes.“
Silicon Valley has become the emperor who wears no clothes. Many Venture Capitalists (VCs) like the emperor will hold their head high and continue their procession for the sake of protecting their management fees.
…the simple fact remains that very little disruptive innovation is born. And without disruptive innovation (and the risks that such innovation incurs) it is just a matter of time before the Limited Partners (LPs) recognize that the emperor’s procession is coming to an end.
Mr Hoegaerden says that there is a malaise in the VC sector but that VCs are quick to blame everybody but themselves.
The sheer size of LP commitments outstanding to the VCs will keep the emperors procession going for a while, and the VCs refusal to criticize themselves is a sign that it is incapable of recovery and self regulation. We need new VCs, with a new mindset and a different DNA to get there.
I don’t see many signs of things changing regarding the VC industry’s malaise. Industries only change when there is a considerable amount of pain and there’s not that much pain (yet) on the VC side of the innovation equation.
Judy Estrin, is another serial entrepreneur, and she has also been warning about the endemic problems within Silicon Valley. She says that many different groups will agree with her, but they will blame others for the problems.
It’s not only the economy that’s to blame for the problems in investing in innovative companies, it’s the lack of exits. The IPO market is almost non-existent these days, this was an important new source of capital that was reinvested.
Currently, the exits are far fewer, and they rely on acquisitions by larger companies. However, mergers and acquisitions over the past ten years have reduced the number of larger tech companies. There is less competition for acquisitions and that makes it a buyers market with lower valuations.
Eventually, the IPO market will return, probably later than sooner, and that will help restore the cycle of innovation. But will we have a decent crop of companies to IPO? We might not if the VC community doesn’t change and evolve sooner than later.
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Here is Judy Estrin in a brief speech about Silicon Valley issues, at a recent SDForum event where she was one of four Visionary Award winners.:
Tom Foremski reports on the business and culture of Silicon Valley at the intersection of technology and media. He also writes at Silicon Valley Watcher. See his full profile and disclosure of his industry affiliations.
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