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Saturday, October 07, 2006

Is The VC Model Broken?

The traditional venture model seems to us to be broken, says,Steve Dow, a general partner at Sevin Rosen Funds, a frim which has in the past helped the rise of several good brands in the tech industry. The high-risk, high-return venture capital business may have turned into all risk and no return. The message here is that it could not continue to take their money — at least not for the time being. A terribly weak exit environment, referring to the dearth of initial public offerings and to a market for acquisitions at valuations that it considers too low to deliver the kind of returns that venture investors expect are amongst the factors for blame. While the likes of YouTube and Facebook are said to be entertaining acquisition offers in the $1 billion neighborhood, that pronouncement may seem surprising. But Mr. Dow said those “megadeals” were rare and were not enough to sustain an entire industry.
Earlier, I wrote about the private equity rage and how the aggression of private equity is touching most part of business today . Pointing out that there has been more than $38 billion in dividend recaps so far this year, up from about $7.7 billion in 2004. While this is guaranteeing the private-equity firms cash in their pockets, the added debt means higher loan payments, which not every company will be able to manage. That's especially true in an environment of slowing economic growth and rising interest rates. Credit rating reports suggests that in a sample set they find the default percentage to be about about 6 percent compared to about 3.7 percent default rate in normal cases. All these definitely merit thought and discussion. In reality the growth of the VC movement is indeed real – while it may be argued that some of these are going after funding insane ideas, what I like about the VC ecosystem is its ability to correct itself faster, despite being big in size. So I would think that the VC ecosystem is not so badly broken as things stand today. Risk, reward have an equilibrium of its own and things would definitely look more optimistic in the days to come – only exception would when the global economy’s shine gets dull.

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Sadagopan's Weblog on Emerging Technologies, Trends,Thoughts, Ideas & Cyberworld
"All views expressed are my personal views are not related in any way to my employer"