The NVA Blog

In a wonderful instance of irony or serendipity, the YouTube acquisition by Google was announced the same week The New York Times ran a story about the VC model being broken “A Kink in Venture Capital’s Gold Chain“. Daniel Primack’s P.E. Week Wire covered this also (here).

The article talk about the VC model itself being “broken”, and then P.E. Week Wire argues the firms themselves have to change too. For example, Sevin Rosen Funds argues that the available exits for VC backed companies has changed for the worse. They believe tha that this change is fundamental enough to NOT raise another fund until a new model is found. There are the commonly cited reasons; The IPO market has been all but shut-down for VC backed companies due to SOX and impatient hedge funds jumping the gun. Further the high-profile, megadeals such as YouTube are exciting, but insufficient to sustain the industry. Another issue is that there is arguably too much money being deployed in some of the trendy sectors, which makes the likelihood of enough juicy buyouts weak due to volume. (It’s all a numbers game, after all)

The good news is that the industry IS evolving. There has been a growing trend in the last 2 years or so where partners from larger firms have decided to not raise another large fund, left the big firm, and gone on to start another firm focused on early-stage deals with a smaller fund. Some of the Tier 1 VC firms out there today started as early stage firms and got bigger and bigger as they knocked down successful funds in the 90s. Firms like YCombinator, True, and Labrador are a few examples of seed/early-stage firms that roll up the sleeves and are pushing the envelope on ways to fund innovative companies without placing excessive exit demands on them from the get-go in order to satisfy the requirements of big funds.

There is no question that the exit environment is tough, and the “hot” markets get quickly over-populated due to ambitious entrepreneurs, an excess of private equity, and of course greed. The MBA-camp is reworking their formulas, algorithms, and spreadsheets and the operational guys are thinking deeply about how to drive cost out of the model top to bottom. At the end of the day, VCs are for-profit companies that will have to evolve and adapt to market changes and new competitors just like the companies they fund do every day. It is beginning to happen in some circles. As with everything in business the Rogers curve will be followed. There will be firms that are Innovators and Early Adopters, there will be a Majority, and then the Laggards.

The only thing that is for certain, is that the VC model needs to evolve and adapt. Broken or not, this industry fuels massive amounts of innovation and growth in every industry sector (even cars as we previously blogged about here), and we need to see the VC model evolve and survive.

Something tells me that Sequoia Capital doesn’t think the model is broken. They have invested in many of the stars - Apple, Cisco, Oracle, Yahoo, Google, etc. They just made a 43x return on YouTube. We are talking about over $400M in less than 2 years.

Even smaller exits, like Grouper’s sale at $65M to Sony, were profitable to the investors. Grouper had raised 5.25M, so that’s a 12x exit, which is very respectable.

New models will emerge in the next few years, many will be tried. In the meantime, we believe building solid companies that are operationally efficient and provide meaningful value to their target market will be successful. What do you think?

The Colorado-focused CTEK Angels network is hosting an event called “CTEK Angels Live” on October 17th in Denver. CTEK is opening the doors of a real investor meeting to a broader audience so that people can get a glimpse of the thought process, questions, and criteria Angels look at while evaluating a deal. I am a registered CTEK Advisor (different group), and do plan on attending the event. I am curious to see how “real” it ends up being given the circumstances, but regardless I aplaud CTEK for providing this kind of visiblity to a broader audience.

Event details are here.

If you are looking for a user-friendly way to get updates on movements in the venture business and some of hot companies, check out the Venture Voice podcasts. You can download the mp3s or subscribe via iTunes. Well produced content that features the founders or execs from some of the fast moving, innovators in the tech/web 2.0 sector.

What to look for: Segments where entrepreneurs talk about what makes their companies click or how they are unique in the market. Check out the workshops too!

This post is not about podcasting, but I will take this opportunity to suggest if you are not already a podcast subscriber, check it out. The auto-downloading of fresh content into your media library means you don’t have to think about it, and you can listen in whenever you feel compelled even if you are offline. With the overload of tech and venture news out there, listening instead of reading (while multi-tasking of course) is a nice change of pace.

While working on my post about Apple and Leopard I found this on c|net. Perhaps its not brand new or earth-moving, but I found it to be a useful, usable tool and a cool way to see the relationships between stories or content subjects. Here is a live example It looks like liveplasma.com is the actual tech provider, and they have done a nice job of repurposing software they developed for music relationship mapping to news content. I like it…