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Sevin Rosen's message to the venture world today is: It's not us. It's you.
In explaining why it's ceased to raise a tenth fund, Sevin Rosen wrote that there is too much money chasing too few deals and the exit environment is weaker than normal.
Tell that to Sequoia Capital. Tell that to Kleiner Perkins Caufield & Byers. Or tell that to the handful of relatively new firms such as Granite Global Ventures, General Catalyst Partners or DCM that have made a name for themselves with smart investment strategies in the past decade.
The key is for successful venture capitalists is to snare the few deals worth doing. And they avoid the weak exit problem altogether by either finding fabulously fast-growing consumer startups that can be flipped quickly or simply by building profitable businesses that can wait out the weakest of exit environments.
Sevin Rosen's exit is precipitated by a poor succession strategy and a failure to adapt to a new venture capital climate that now rewards international bets, a mix of a young and old partners and segment specialization. Oh yeah, its mediocre returns didn't help the firm's case. According to a cover story in The Deal in August:
This second generation has had a rockier road. The telecom bust in early 2002 proved to be Sevin Rosen's biggest challenge, sending its seventh fund's internal rate of returns into negative territory, according to data provided by the California Public Employees' Retirement System.With its conscious choice to avoid investing in the Internet, Sevin Rosen seems to have limited its chance for big returns in later funds. With only the first three funds totally closed, there is still an opportunity for those higher returns, but so far it looks like the first four funds are blockbusters with Fund V having a positive, if lackluster performance. Funds VI through VIII, however, contain many of the problematic telecom plays.
There have been a few exits so far from those later funds, though none on the Compaq or Lotus scale: radio frequency identification chip maker Alien Technology Corp. filed for a $138 million initial public offering in April after raising more than $200 million. In July, it reduced the offering to $90 million to $108 million, then withdrew the IPO on August 4. Biotech startup Cytokinetics Inc. went public in 2004, although it's since seen its stock fall by 66%. (Sevin Rosen still holds about 9%.)
If Sevin Rosen really believed that the industry had changed so much that the lack of exits made it a poor one to be in, then why did it say it was on track to raise a $300 million fund a few weeks ago? It seems limited partners had grown tired of the firm's lackluster returns.
Despite Sevin Rosen's claims, there are few lessons from this fundraising failure that should be applied to the entire venture capital industry. This is about one firm's inability to succeed without its founders. It's about a firm's unwillingness to believe in new technology movements such as the Internet. What it's not about is the venture capital model being broken.
For more on Sevin Rosen's decision not to raise another fund, see:
The New York Times
Fred Wilson
Paul Kedrosky
Tags: sevin+rosen, sevinrosen, vc, venture+capital.
That's good stuff, hmmm. Thanks for the comment.
But, let's look at General Catalyst a little more closely. They were established in 2000 and closed funds in 2000, 2001, 2004 and 2006. Since then, they've achieved some exits. The returns may not be huge, but portfolio companies such as m-Qube, IMlogic, SiteAdvisor, Upromise and Venetica have been acquired. And Taleo achieved an IPO last year.
So, the firm is clearly building some value. And with promising companies such as BrightCove and Kayak.com still private in their portfolio, it appears they have a sound strategy.
Josh, sometimes i feel like i'm the John Bogle of Private Equity, but the exits you cite are all in the funds which are down 19% and 12%. Doesnt prove your point; but does prove mine -- if thats what VC returns are, who wants to own the asset class?
either because its a temporary slump, or because its a fundamental change in the underlying value of the asset class, for many years now, and for the foreseeable present, VC has not created/is not creating anywhere near the value it needs to in order to justify its existance (or to justify its amazingly high "management" fees -- which, in a world of scant and low value exits, are arguably are at the root of the problem. )
Those are more good points. So, I put them to General Catalyst.
Here's what they said: "I appreciate your reaching out. I wish I could provide you with the information you are seeking, but it is our policy to disclose the performance of our funds only to our Limited Partners. I'm sorry I could not be of assistance to you and again, thanks for checking-in."
Here's what I have to take from that, hmmmm: You're right. I was wrong to include General Catalyst as an example of a new firm with a smart investment strategy. I stand by DCM and Granite Global. And I'll be ready to reconsider General Catalyst if someone from the firm wants to answer a question or if one of their portfolio companies hits in a big way.
I dont know about Granite or DCM, but I am close with a few LPs in General Catalyst, and while they may be terrific people, their funds performances don't support your contention. GCI and GCII are down roughly 19% and 12% respectively, and they have been around long enough that the old "yeah but its the J curve" excuse is wearing mighty mighty thin.
The new generation of firms hasn't yet demonstrated "smart investment strategies in the past decade" and may never do so -- all they have done is shown how ridiclously easy it is to raise VC funds and how pathetically unattentive LPs can be.