PwC: Venture Capital Industry Not Scalable (video)

February 1, 2011

In 2010, venture capital firms raised $12 billion (down from $16B in 2009) and invested $22 billion (up from $18B). For PricewaterhouseCoopers Steve Bengston, who spoke this morning at SDForum’s Quarterly Venture Breakfast, this is simply not sustainable.

Good News: deals are up

According to the MoneyTree report which tracks venture capital investing, venture capitalists invested $21.8 billion in 3,277 deals in 2010, an increase of 19% in dollars and a 12% rise in deals over the prior year. More here.

“2010 was a kind of a funny year… 3 flat quarters and one outlier which is really more of function of about 3 huge cleantech deals, so it wouldn’t be too much off the mark to say that 2010 was a bunch of $5 billion quarters,” explains Bengston.

Bad News: weak IPO market, lack of funds, no jobs, shrinking VCs, China

“The problem with venture capital is not how much (deals) is coming in, but how much it’s coming out,” says Bengston talking about the lack of IPOs.

Also, 2010 saw the biggest delta between VC investing and VC fund raising ($12B), the lowest since 2004. It’s not scalable!

On jobs, Silicon Valley saw no net job creation in 15 years!

“Here’s a period arguably the greatest period of wealth creation in the history of civilisation and there is no more jobs today than there were 15 years ago,” adds Bengston.

VC industry is shrinking:

“There’s a prominent VC that did their own study that claims that 97% of VC profits come from 15 companies each year. Now let’s say it’s only 90% coming from 30 companies. But it still begs the question: how many VCs do you need to find the 30 really good companies each year. Today the answer is: about 2000; and you might think it’s more than you need.”

On China:

“David Rubinstein, the CEO of Carlyle, was quoted recently saying that China was the #1 economy in 15 of the last 18 centuries. So, just because they had a couple of bad centuries, you don’t want to rule them out. They have a history of success.”

Other highlights of  2010 venture investing:

  • Silicon Valley: 40% of the total VC investments, up from 23% in 1995
  • 30 years ago, Boston was the mecca for venture capital investing
  • Silicon Valley took over Boston about 15 years ago
  • Now, Southern California is emerging as the next big area that might eventually eclipse Boston in a year or 2
  • But no new net creation of jobs in Silicon Valley in the last 15 years
  • About 200 series A deals (~$1 billion invested) per quarter
  • Most of the money has been going in later stages, expansion rounds
  • There were even “N” rounds of investing in 2010!
  • Top active VC: Kleiner Perkins with 79 deals, over a deal/week; then First Round Capital and NEA
  • Intel is the only corporation that has ever made the “Most Active VC” list
  • 72 IPOs in 2010 vs 12 in 2009 or 6 in 2008; timid come back
  • 274 mergers and acquisitions, the biggest since at least ’04; but low valuations
  • Advertising is migrating to the Web and reach 20% of the $600 billion market
  • Asian millionaires exceeds European millionaires

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Consumers Not Ready To Buy Green, Unless It Saves Money

February 5, 2010

Buying green is wonderful on paper. But unless it saves money, the American public isn’t ready to fork over its paper currency.

This is due in part to a lingering skepticism over global warming, despite overwhelming scientific evidence supporting the planet’s growing peril. It also is the result of an unwillingness to associate global problems with local decisions, such as the purchase of plastic picnic ware.

For most consumers, “it’s not about saving the world,” says Scott Potter, a venture capital at San Francisco Equity Partners. “That’s for only 2 percent of the population.”

Most consumers aren't interested in saving the world with their purchases, says venture capitalist Scott Potter. Only about 2% are.

As scientists and well-meaning politicians urge the nation to become more environmentally conscious, the barrier to greater action becomes clearer each day. Living a greener life has got to go hand-in-hand with the simpler, more base motivation of financial benefit.

In other words, solar power, wind energy, electric cars and green consumer goods have to be less expensive to be popular. This conclusion was at the heart of SDForum’s “Consumer Clean Tech Trends” panel discussion Thursday evening in Silicon Valley. The evidence was overwhelming.

Look at utility customers across the country, insisted Jan Pepper, assistant general manager of energy resource planning at Alameda Municipal Power. Only about 2 percent of them are paying a premium for power derived from renewable sources.

“I don’t think people are willing to pay more for green,” she said.

The same is true with carbon offsets, which were hit hard during the recession. Provider TerraPass participates in expensive projects to recover methane from cow manure at dairy farms and landfills. Methane, a greenhouse gas, is much more damaging than CO2 but difficult to collect.

"I don't think people are willing to pay more for green," says Jan Pepper, an assistant general manager at Alameda Municipal Power.

“There is a very small number of people willing to do the right thing” and support the projects, says Pete Davies, TerraPass president. “It’s not a very big market.”

The reluctance to pay for green is apparent at retail as well. During the downturn, premium brands languished on store shelves, and green is considered a premium item. Whether soap or bleach, basic functionality drove purchase decisions, not global benefits.

At the same time, a basic level of “greenness” is being built into mainstream products from big producers, such as Procter & Gamble. “I don’t think you’re going to be on the shelf if you’re not green” in the future, says Potter. But of course that means buying decisions will be made on grounds other than green if it becomes the standard.

Perhaps the solution is to challenge people on the local level, where comparisons are easy to make, says investor Tod Francis of Shasta Ventures. There is no more powerful an incentive for urging people to make energy conservation improvements at home than knowing their neighbors are paying less, says Francis.

But then than means everything still to come down to dollars and cents.

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Posted by Mark Boslet

Dyyno Uses P2P To Stream Videos For Free

October 30, 2009

Dyyno CEO Raj Jaswa claims his proprietary peer-to-peer technology can beat established video streaming companies like YouTube or Ustream

Dyyno claims it can disrupt the video streaming world using the tried and true, but also controversial and unreliable, peer-to-peer technology.

“Dyyno came along with a breakthrough technology developed by 8 to 10 PhD students at Stanford Multimedia Labs working on a project to bring video distribution cost to zero, the same way text distribution is zero,” says Dyyno CEO Raj Jaswa who I met at the SDForum event on Collaboration 2.0 today.

Using its own P2P technology, the Palo Alto, Calif.-based startup vies to beat more established Internet video streaming companies like YouTube, Ustream and Justin.tv. “The question is can you really do peer-to-peer in the Internet world which is uncontrolled peers, bandwith, processing point… and can you really do it live. And that’s the research the PhDs did and solved pretty much all the problems,” adds Jaswa.

The 20-employees company also sees another advantage to its solution: users get to keep control of their content.”With all our competitors you loose control of your content,” and all the advertising dollars that go with it.

Dyyno’s business model relies 100% on advertising!

“The company is built on using the free ressources of the Internet which is uplink of the viewers, and the broadcaster has enough horsepower in order to do the streaming. So essentially by eliminating cost we ended up with the ability to distribute video for pretty much free. Which means that our business model is actually advertising.”

But Dyyno’s software as service solution is still very much in its infancy.  I tried unsuccessfully to access the channel part of Dyyno’s site to view a broadcast but the site kept on crashing. A new version of Dyyno’s service is expected later this month, and hopefully will solve most of the bugs and problems.

Follows a video excerpt of our interview with Dyyno CEO Raj Jaswa:

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Banker Reveals How The Pentagon Is Subsidising Foreign Oil Imports To U.S.

October 6, 2009

The U.S. has only itself to blame - and the U.S. military - for its dependency on foreign oil

The U.S. has only itself to blame - and the U.S. military - for its dependency on foreign oil

What a shocker!

According to the GrowthPoint Technology Partners‘ managing director Robert Horstmeyer, the U.S. military helps subsidising the price of the country’s foreign oil imports to a staggering $50 per barrel of crude; today the barrel of crude rose a bit over $70.

All energies are subsidised, not just the clean, renewable ones

So if Horstmeyer’s calculation is right, the “real” price of gasoline in the U.S. should be closer to $5-$6 a gallon than the average price of $3 in California today, for example.

“It’s very difficult to figure out, when you’re looking at different energy supply, what the real cost of energy is. Everything is subsidised and some of it is dramatically subsidised,” explains Horstmeyer, speaking at an event on solar energy hosted by the SDForum.

The investment banker claims – citing military sources – that the Pentagon is spending about a third of its defense budget – which represents $518.3 billion in fiscal year 2009 – to protect the oil fields in the Middle East, “plus 2 wars!”

“So we’re talking hundreds of billions of dollars a year to import maybe 10 million barrels a day. So if we want to cost that oil properly, we should add $50 a barrel to those imported barrels coming from the Middle East,” explains the investment banker.

Follows are 2 video excerpts. The first related to Horstmeyer’s comments on oil subsidies and the second is his introduction remarks.

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[SDForum] Cloud Startups Must Hit $10 Million To Attract Venture Money

April 16, 2009

Speaking at last night’s SDForum‘s town hall event on venture capital investment in software startups, venture capitalists from Morgenthaler and Shasta Ventures want to see software-as-a-service (SaaS) or enterprise Cloud computing startups reach $10 million in sales before considering investing in it.

“What we’ve learn over the last 5 years is that SaaS companies take a lot longer to get profitable that what most VCs plan on. And a lot of these SaaS companies can hit $10 million in revenues and then they hit a ceiling. And so we’ll go very early stage in a few things but things like SaaS where we learned that lessons through the years – unless there’s an extreme hockey stick ramp – we’ll wait until they hit that [$10 million] mark,” explains Morgenthaler Ventures principal, Rebecca Lynn.

And to further make her point, Lynn adds:

“There’s just a lot of expense to get that momentum going. But if we see something as compelling as Salesforce that is taking off like wildfire and virally adopted, that would be an exception. in general, what we’ve seen in SaaS is that they could be very good companies but is sort of a slug up to a certain point.”

However, cloud startups can break that $10 million ceiling by having quick sales cycle, as Shasta Ventures, Evan Liang explains:

“What we’ve seen about this $10 million ceiling is wether or not that company can be very crisp in their value proposition and have a very repeatable sale process. It seems that if you have a great founder, he can personally bring himself to a certain revenue, but if you can’t build that sustainable, scalable salesforce that’s when they hit the wall.”

For Shai Goldman, who co-manages Silicon Valley Bank Capital‘s Venture Exchange program, the cloud startups that are doing well do telesales and use a lot of self-service features to accelerate the sales cycle rather than having a lot of salespeople out there trying to sale one company at a time. “I’ve seen companies with $1 million revenue run-rate, meaning you have to hit a $100,000 in revenue or so and growing, and at that point they can raise a series A,” said Goldman.

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[SDForum] Venture Capitalists Reflect On An Industry In The Doldrums

April 16, 2009

Speaking at last night’s SDForum VC roundtable town hall meeting on software and Cloud investments, venture capitalists from Morgenthaler and Shasta Ventures spend a bit of time reflecting on their industry which has been hard hit by the downturn.

Here were their most “colorful” comments:

Rebecca Lynn of Morgenthaler Ventures saw series A pre-money valuations come down to earth

Rebecca Lynn of Morgenthaler Ventures is seeing series A pre-money valuations finally come down to earth

Rebecca Lynn, principal (Internet services, digital media, financial services and software), Morgenthaler Ventures

“The biggest thing that has changed is that pre-money valuation on a series A has come down to earth. Right now, $3-$5 million is completely market for a good series A and you could expect a VC to take 20 to 40 percent [ownership] and I think 30 percent is probably the norm.”

“IPOs are not an option for a little while until some things fundamentally change. The average to an IPO is now 8.3 years, and almost 7 years to an M&A (mergers and acquisitions). And that doesn’t work in venture economics, because it’s still 3 to 5 years before you need to have a liquidity event.”

“To be venture back-able, you’ve got to paint in your picture a way your company could possibly be a billion dollars business or sell for a billion dollars, and have other options on the way down.”

“In this environment, a lot of VCs are moving later stage because they can essentially do a series C at a series A price.”

“Venture money is not right for many businesses. But, it doesn’t mean it’s a bad idea.”

“Right now, probably one of the last places you want to put your money in is Venture [capital].”

“Don’t bring your grey hair adviser in your meeting with venture capitalists, never. Ever!”

Evan Liang of Shasta Ventures sees a more smaller venture capital industry

Evan Liang, senior associate (Consumer Internet, Software), Shasta Ventures.

“The venture capital industry is going to be smaller over time. When you look at the amount of fundraising from LPs [or limited partners] and that will be smaller over time as the total pool of dollars get smaller and you should expect smaller rounds [of funding for startups] in the future.”

“You have a lot of venture capitalists that are taking a lot of meetings but it’s almost for entertainment value! And that’s unfortunate for the entrepreneurs.”

“The Angel market has been hit very hard in this downturn”

“Seed stage investing can also be interesting in this environment because if you take a 7  to 8 years exit period, you will be exiting in a hopefully different environment.”

“If we map this downturn with the last one [in 2001], and if optimistically we have a turnaround as quick as the last one because I think this one is worse, 2008 would be compared to 2001 and 2009 would be like 2002. Venture activity was still pretty much dead in 2002 and it was more of 2003 that you saw more of a turnaround and a pick-up in activity. And in an optimistic case, you might look at 2010 before you see things really picking up a bit.”

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Venture Capital Industry To Shrink Further, Sonsini Predicts

March 23, 2009
The ever optimistic NEA Partner, Pete Sonsini, is less so about his own industry

The ever optimistic NEA Partner, Pete Sonsini, is less so about his own industry

More venture capital firms are going out of business and the trend is accelerating.

Speaking today at SDForum’s Global Open Source Colloquium in San Francisco, NEA‘s partner, Pete Sonsini, didn’t sound very optimistic on his own industry.

“For the past 8 to 9 years, venture capital returns have not been there… It’s [the VC business] going to contract a lot,” adds Sonsini.

The venture capitalist pointed that at the height of the Internet bubble, there has been over 1,200 venture firms. In 2007, the number shrunk to 800, including 200 that were not very active. And today, only the ones posting good returns will survive.

Where are all those venture capitalists going? Retiring? Not quite.

“Some are going back into operations,” said Sonsini.

The advantage I see for an ex-VC to run your company is that s/he could ask her/his “friends” to fund it :-)

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Credit Crunch 2.0: Institutional Investors Are Not Picking-Up The Cash-Call Anymore; Lots Of Venture Capital Firms Might Not Survive

December 10, 2008
Large investors are out of cash? For Nexit's venture partner, David Aslin, this is the venture capital world's little dirty secret.

Large investors are out of cash? For Nexit's venture partner, David Aslin, this is the venture capital world's little dirty secret.

Talking to several venture capitalists and entrepreneurs over the past couple months, I’ve been wondering when large investors like corporations or mutual funds – also known as “Limited Partners” – will actually stop funding venture capital firms. Well, the time is NOW!

Washington Mutual is the first of these large LPs to default on its commitments to invest in venture capital funds – like the one run by FTVentures – when “called” for the money.

“Yes, an LP will lose most of its past investments and their returns if it doesn’t comply with its commitment and comes up with the money. But it’s not like WaMu had any other choice; it didn’t have any money, it was bankrupt,” explained David Aslin, a Nexit Ventures venture partner.

Young venture capital firms will not survive the downturn

The dirty little secret in our industry is that more “defaults” are coming, predicts Aslin. “And it’s going to impact our industry hard,” added the venture capitalist.

So far, the credit crunch has mostly affected investments in new startups and ideas.

But the sudden drought of institutional capital is affecting VCs as well and in particular the “younger” or newest venture capital firms that plan to be raising money in 2009 or 2010.

“Investors are going to look at firms historical returns; and most likely will not invest in a firm’s Fund 2 or 3 that has very little or no history of success,” pointed Steve Bengston, Pricewaterhouse Coopers’ managing director of emerging company services.

Bengston believes that a lot of VCs will just not be able to survive this down cycle and I unfortunately have to agree with his assessment.

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Memo To Silicon Valley: 2009 Is The New 2001, All Deals Are Series A; But VCs Are Hurt Too!

December 9, 2008
Amid the general gloom and doom, Cleantech and Life science companies are doing well, according to PwC managing director, Steve Bergson.

Amid the overall gloom and doom, Cleantech and Life science companies are doing better than their peers in the Tech sector, according to PwC managing director, Steve Bengston.

So the word is finally out. No, not about the recession which everybody in this country – except perhaps the U.S. government – felt since last year when gas prices were going through the roof, but about what’s really happening in the cosy venture capital world of Silicon Valley today: fire sale of startups; cram-downs, slashing startups valuations; venture capitalists layoffs; venture firms closing, etc.

All fund raising are now A-rounds

And for Pricewaterhouse Coopers managing director of emerging company services, Steve Bengston, it’s 2001 all over again. As a result, companies in need to raise additional funds in 2009 will pay a much higher price for it.

“It’s a buyers market. And certainly a great time for venture capitalists that could get their hands on very good companies and technologies at unbelievably cheap valuations, in the single digit! For entrepreneurs, it will not get better until perhaps 3 or 4 years from now,” predicts Bengston, speaking this morning at the SDForum‘s Quarterly Venture breakfast event.

Entrepreneurs and startups are not the only ones feeling the pain. Venture capitalists do too!

“The Limited Partners (LPs) that are funding venture capital firms are complaining of their investments’ poor returns. Firms will then have to layoff their poor performers while others will just shut down because they couldn’t raise their next fund,” adds Bengston.

Although the credit crunch is hurting Silicon Valley more than the previous Internet bubble burst because of its worldwide phenomena, Bengston sees Cleantech and the Life science as “robust” sectors for the years to come.

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Gaming Market Readying For Big Shift: Games Must Become Online Services Instead Of Retail Products

December 6, 2008

If the video game industry is to prosper over the next five years, it will need to follow the lead of business and consumer software and turn itself into an online service.

Todays business isnt attractive, says Lars Buttler

Today's business isn't attractive, says Lars Buttler

That may mean learning to survive on subscriptions, advertising and the micro-payments players shell out for in-game extras – instead of retail sales. And it may hinge on attracting a broader audience than the 18 to 35 year old males who are today’s typical gamer.

This was the prescription from “Gaming: The New Frontier,” a conference sponsored by the SDForum and designed to look ahead. Several gaming executives said they saw promise in games for mobile devices, such as Apple’s iPhone. Other said the industry needed to concentrate on fewer, better titles.

But most agreed big changes were necessary. “Quite frankly, right now the business is not particularly attractive,” said Lars Buttler, founder of Trion World Network, a startup building server-based games for online play. “The future should be software as a service: games as a service.”

Today, the gaming market is saturated with shrink-wrapped products, some not so good, others big budget titles that only the largest developers can afford to produce. While games allow players to compete against each other online, synchronizing play is difficult because the games are running on separate PCs or consoles instead of a central server.

People must move from packaged products, says Anne-Marie Roussel

People must move from packaged products, says Anne-Marie Roussel

“People have to move from this packaged goods stuff,” said Microsoft’s Anne-Marie Roussel, director of strategic and emerging business. “Gamers more and more want to be social.”

Building a server-based game puts competition on a level playing field, Buttler pointed out, since the server coordinates play. It also allows games to be updated and changed more easily, and makes collecting data about game play simpler.

In addition, hundreds or thousands of players can participate, instead of scores.

“We believe that’s the answer to where we are going,” said Buttler.

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Posted by Mark Boslet

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