April 21, 2008
Testing times for venture capital funds
All does not appear to be well in the venture capital industry, to judge by the move by Sequoia Capital, one of Silicon Valley’s most prominent investment firms, to broaden its business to include everything from shares to property.
That follows shifts by two of the UK’s longest-established venture capital firms - 3i and Apax Partners - away from early stage investing and towards buy-outs of established companies.
Sequoia’s move would make it look more like one of the private equity firms, such as Blackstone and Carlyle, which have raised funds to invest in all kinds of assets. Property investment has been Blackstone’s highest-return business.
But the fact that Sequoia may follow is a big symbolic shift. Under its lead partners Michael Moritz and Doug Leone, it has been an early investor in many of the biggest Silicon Valley successes of recent years, including Google, Yahoo and YouTube.
If even Sequoia is feeling the need to diversify, what does that mean for the rest of the venture capital industry?
I would think the other PE firms will join the bandwagon.
Of course Sequoia, located in the VC location of the world - Menlo Park, feels the need to diversify is a good thing.
Diversifying would broaden their scope and further allow greater arbitrage opportunities. But also, the current tech market is flat and perhaps they believe the property market is likely to perform better sooner rather than later.
P.S I have just sent you a LinkedIn invite
http://www.linkedin.com/in/bhavinpkapadia
Posted by: Bhavin P. Kapadia | April 21st, 2008 at 5:55 pm | Report this comment- Bhavin P. Kapadia
I don’t see the gradual evolution of finance firms’ business models as surprising — and I speak as an entrepreneur. I started an internet software firm in 1999. At the time we met with Ant Factory, Gorilla Park, Apax and other start up VC funds. The small VC firms went out of business within 2 years. The explanation for change is partly about the market and partly about elite capitalism. Apax has shifted to private equity because the IRR on early stage technology in Europe has been appallingly low (less than a high street bank savings account). Same for 3i. Why go through the seed capital heartache when you can do PE deals with much lower risk and much higher returns? The elite capitalism: VCs and PEs meet for dinner and the latter order wine which is 10X the price of the VCs. Why bother with early stage when you make no money? The Blackstone IPO was the peak of the PE market. So VCs moving to PE look very late to the party. The new market is climate change and thats what verdantix researches.
Posted by: David Metcalfe | April 21st, 2008 at 11:07 pm | Report this commentThis is serious food for thought, if you’re a policy maker, an entrepreneur, an investor, a student, a worker, a unionist, indeed everyone; even more so, when you add in general global uncertainty. I’ve only invested in one new venture in the past 5 years. Why?
Posted by: Jim Donovan | April 22nd, 2008 at 12:00 am | Report this comment* Too few successful ventures, too many duds.
* Investor flight to quality.
* The long term shift offshore of manufacturing has eroded the pool of talent for technology start-ups.
* You don’t actually need much money these days to get an online software/service business going (which means low barriers to entry and lousy on-average returns).
This is another symptom of the long-term decline of Silicon Valley and the tech industry in general. The fact is that there are still too many venture capital firms relative to the population of start-ups within a reasonable driving distance of Sand Hill Road. There are a few reasons for this:
1. High housing prices have made it almost impossible for a startup in the Valley to remain competitive, once the “me, too” imitators located in places like Idaho or Indiana get started. There is a reason why Genentech’s big new facility is north of Sacramento.
2. H1-B visas and similar programs have poisoned the punch bowl as regards getting college students to consider a career in high tech. By making it almost impossible for a US citizen to get a job in the valley and by pushing wages to half of what they once were, this has destroyed the culture which produced all of those innovations. Kind of like turning the Goose that Lays the Golden Eggs into burgers. Or curry.
3. The Boston suburbs’ high tech cycle lasted 40 years, from 1946 to 1986 (when DEC went broke). It’s pretty much over now. The current cycle in Northern California pretty much started in 1968, which was the year Intel was founded.
Menlo Park has a future as a financial center, for the same reason that Greenwich is a financial center. It’s just that they won’t be doing venture capital from now on. Maybe next time, it will be Redding.
Posted by: Dave Chapman | April 22nd, 2008 at 3:04 am | Report this comment[…] — everywhere except Silicon Valley, where most of the VC spending happens anyway — we have an article on the subject in today’s FT. This entire genre is turning me into a VC […]
Posted by: Business, Women in Business, Business Real Estate News » Blog Archive » No More VC Eulogies, Please | April 22nd, 2008 at 8:47 am | Report this commentThe previous posts are useful insights into the industry.
In Germany - a difficult market whatever type of business one is in - the pattern of front-loading targeted companies with debt, taking them public, exiting with the profits and then moving on has been immensely unpopular politically. It does not fit into the traditional social market economy culture: the fact that so many German companies are still breaking export records and are still optimistic in their forecasts, despite high tax rates, well-organized labour unions in Germany, and the slowdown in the US economy, is noteworthy, is it not?
The biggest PE/Hedge Fund venture into the German property market was Gagfah
LU0269583422, floated a couple of years ago as a REIT (a new, privileged form of property company in Germany), current market cap. €2,4 Mrd., yield 7,94% !!, 12 month performance -48%. It’s worth looking closely at this case and to learn from it.
The fact that some high-profile corporate execs,
Posted by: J.J. | April 22nd, 2008 at 9:48 am | Report this commentgenerally unpopular with the German public (like Ron Sommer, ex D. Telekom, and Klaus Esser ex Mannesman) were hired by anglo-saxon PE/Hedge Funds has not helped the industry’s image either.
But is Sequoia shifting out, or shifting resources away from, VC? It looks to me as if they are not and are raising a fund targeting a new area, much like they did in Israel and China (granted, those expansions were still focused on early stage VC). How much more can Sequoia grow in the early stage tech sector? I think this is more likely a growth issue within Sequoia and their taking advantage attractive opportunities in new markets.
Apax and 3i are different animals from Sequoia - their shifts do actually seem to be to abandon, or at least greatly reduce, their exposure to early stage investing.
Posted by: Sean O\'Leary | April 22nd, 2008 at 2:16 pm | Report this comment