6 ms·

Fred Wilson says venture capital funds have gotten too big

38 points by kevinpacheco 14y ago

brackin 14y ago
"Lately VCs haven't come close to generating the returns on their investments that made them stars in the 1990s." That's because it was in the height of the internet bubble. Companies have to work harder and show real revenue. People may not believe it but the recent IPO's have shown this. Tech companies have to show revenue and progress other than traffic . Companies are springing up that do more than social networking. In the 90's there were many of these crazy ideas but there were no consumers to use them so the valuations were out of whack. I think we're going to see some more ambitious companies coming out. Simple, Square and Uber are the first step.
lifeisstillgood 14y ago
VCs are not too big, they are (apparently) investing in the wrong companies. If humanity overall wins out, the next 20-30 years will see industries we can barely imagine grow to maturity. From electric driver-less cars, to new forms of power generation (even fusion), new building methods, new education, and vast mega-cities will spring out of nowhere. In the West, in the rest of the world, we will see vast demand for things that are barely off the drawing board. And they will need support industries, innovating widgets and helpful doo-hickies. All of which will take specialised knowledge, innovation and investment. Just what VCs are supposed to do. (PS I strongly suspect Fred Wilson already knows this, is intelligent enough to be hiring clever VCs in India, China Sudan, and doing presumably cleverer things than I suggest. But it annoys me that the article seems mostly - oh no! cloud is cheap, so there are no companies anymore anywhere in the world that need high risk investment. Gaaahh!) Here is one that is a perfect example: http://www.ted.com/talks/donald_sadoway_the_missing_link_to_renewable_energy.html http://www.ted.com/talks/donald_sadoway_the_missing_link_to_... Edit: added link, minor fixes
- jakarta 14y ago
  I don't think Fred's investors want to be sinking money in renewable energy. If you look at the returns to that asset class, they've been pretty bad. It's great to do big things and change the world, but the pension funds backing Fred want to earn a good return.
  - antr 14y ago
    "returns to that asset class, they've been pretty bad." Renewable energy assets have a pretty good IRR, in the mid-teens to low 20% - and even higher if you look at the 1995-2004 vintage. To any LP that is an above average return, in fact, it is above any equity return threshold for asset manager incentives/carry. Where did you get the data for you to say that "they've been pretty bad"?
    - lifeisstillgood 14y ago
      I always return to this bet with John Kay: http://books.google.co.uk/books?id=6BLqprHdwygC&lpg=PA151&ots=E7_TYv35xm&dq=undercover%20economist%20returns%20investment%20railways%20USA&pg=PA151#v=onepage&q=undercover%20economist%20returns%20investment%20railways%20USA&f=false http://books.google.co.uk/books?id=6BLqprHdwygC&lpg=PA15... returns for the most successful railroad companies were mere 5% - competition kept things down (although speculation in early years lead to phenomenal returns - if sold) However, a moderate VC return is 3fold over ten years - which is ~12.5% YoY (unless my maths is bad). But then that is 12.5% of millions and millions not just one company.
      - antr 14y ago
        I struggle to understand your point - I'd love to here a bit more to understand it. The IRR numbers I mention refer to UFCF/equity, i.e. no exit (hence return) via company/asset sale.
        lifeisstillgood 14y ago
        That the return (assuming no sale at top of a bubble) for the best companies in the biggest industry of 19C was only 5%-10%. (Based on equity, it seems Harford did not calculate dividend return which may make a difference) Making 15-20% without an exit is a great deal - supporting I think your point.
        antr 14y ago
- jeffool 14y ago
  Being 31, growing up when I did, sometimes the things discussed in TED, and the wonderful future you allude to, seem like flying cars. And not to be down on you, or the future in general. Maybe this is a side effect of growing not only when I did, but where, being in more rural Georgia. Or being "not an optimist". That all aside, power storage really does seem key. Imagine if electric cars could be refueled by an easily accessible battery change out? And one imagines if everything is electric, then advances in any power generation tech transferable to electricity instantly gives advantage to everyone. Yeah, that future is a romantic one. But I just don't know.
  - lifeisstillgood 14y ago
    Well, flying cars do exist: http://bostonherald.com/jobfind/news/technology/view/20220812flying_car_closes_in_on_faa_ok_terrafugia_already_has_more_than_100_orders_for_its_279000_aircraft http://bostonherald.com/jobfind/news/technology/view/2022081... To be less of a dick: I did put in a caveat of "if humanity wins" - my sort of catch-all term for avoiding the collapse of a global civilisation that arguably has been in existence since, well, Gutenburg, or possibly Newton. But the idea is that the available-at-one-point-to-one-socieity-sum of human knowledge has been only expanding since a given point (the burning of library of Alexandria would count as a net loss of knowledge so it does not go far back this idea), and that if it is to keep exapnding we are going to solve something. Maybe cancer, maybe flying cars. Maybe something else. But there are only two directions - up and down. I am hoping for the up. I can understand the doubt. We humans are real good at screwing it up. But ... I think the scientific method is permeating enough societies that even if Western world collapses, India, Brazil etc are likely to be independant civilisations themselves. (I have had pleasure of working with many Indian natives over here, and their generation is going to want some serious changes back home.)
jpkeisala 14y ago
Can one start a tech company anymore without Venture Capital?
- GFischer 14y ago
  Yes :) . Depending on your definition of tech, of course, there are several bootstrapped companies. Some examples include Github, Imgur, Carbonmade, 37Signals, Braintree, DuckDuckGo, AppSumo, Atlassian, Envato, etc, etc... There are also other sources of funding (ex: StartupChile), and that's not even counting angel investors.
  - chimeracoder 14y ago
    I'd exclude Imgur, as last I checked, it wasn't making much money (perhaps even a loss?). Also, Github and DuckDuckGo both took significant venture funding from a16z and USV, respectively. They both grew a substantial userbase (and the former a revenue stream) before taking venture funds, which is a different model for venture funding than is popular today, but they both decided that they needed venture funds in order to realize their ultimate goal. On a related note, I would consider companies that are bootstrapped by fairly wealthy individuals/angel investors to be a separate class. They're still often backed by former founders of successful startups that had exits (so in some sense, they were able to fund their startup because of previous venture money). An interesting question is how many companies are founded by individuals with next-to-no capital and take no venture money at any point in their life cycle. It's a different question from the one that GP asked, but it's a far better metric for something we like to pride ourselves on in the tech community: mobility/meritocracy. We're definitely in a different place than we were in the 90s, when venture money was needed even to get basic server access (today we have plenty of IaaS/PaaS/SaaS companies that reduce the costs). Now, it's possible for someone to create the beginnings of the next Facebook on a student's budget. But that's different from being able to create the next Facebook on a student's budget (ie, without taking any venture money). I agree that there are still examples even with my stricter critera; they're just less common at the moment.
- smackfu 14y ago
  What's a tech company? There are certainly examples of small teams or single developers making a living from selling software on the various app stores with no VC funding.
stitchy 14y ago
I'm curious why Fred Wilson would proclaim to the world that investing in his VC firm isn't going to give you the return that you're looking for these days. Is there a short term gain for him that I'm not seeing? Or is Wilson genuinely trying to change an industries path with a few words of wisdom? I'm not suggesting that his advice is bad. It seems to make sense to me.
- jusben1369 14y ago
  One of us missed something here. I did not see Fred saying investing in his firm is not a good idea. I saw him talking about VC's in general having a poor return and thus putting investors on the fence. It's probably safe to assume that with Fred's profile and track record he's not personally struggling.
- notatoad 14y ago
  Maybe he's just trying to manage expectations?
mathattack 14y ago
Let the market decide this. My impression is that the average VC firm doesn't deserve the carry plus expenses. The great ones do. (And it's strange they all still charge the same variant of 2/20) So what will the market decide? I have no idea. But if the ex-Netscape/LoudCloud types can return good money to their investors, they will be trusted with more money. And this should continue. If they don't, the funding will dry up soon enough. The invisible hand will guide this, so there is no need to intervene. If 200 funds investing X dollars is better than 20 investing 10x, the returns will show it. If the status quo is somehow a disservice to innovation, then it becomes a national R&D funding issue rather than a VC issue.

38 points by kevinpacheco 14y ago

"Lately VCs haven't come close to generating the returns on their investments that made them stars in the 1990s." That's because it was in the height of the internet bubble. Companies have to work harder and show real revenue. People may not believe it but the recent IPO's have shown this. Tech companies have to show revenue and progress other than traffic . Companies are springing up that do more than social networking. In the 90's there were many of these crazy ideas but there were no consumers to use them so the valuations were out of whack. I think we're going to see some more ambitious companies coming out. Simple, Square and Uber are the first step.

lifeisstillgood 14y ago

VCs are not too big, they are (apparently) investing in the wrong companies. If humanity overall wins out, the next 20-30 years will see industries we can barely imagine grow to maturity. From electric driver-less cars, to new forms of power generation (even fusion), new building methods, new education, and vast mega-cities will spring out of nowhere. In the West, in the rest of the world, we will see vast demand for things that are barely off the drawing board. And they will need support industries, innovating widgets and helpful doo-hickies. All of which will take specialised knowledge, innovation and investment. Just what VCs are supposed to do. (PS I strongly suspect Fred Wilson already knows this, is intelligent enough to be hiring clever VCs in India, China Sudan, and doing presumably cleverer things than I suggest. But it annoys me that the article seems mostly - oh no! cloud is cheap, so there are no companies anymore anywhere in the world that need high risk investment. Gaaahh!) Here is one that is a perfect example: http://www.ted.com/talks/donald_sadoway_the_missing_link_to_renewable_energy.html http://www.ted.com/talks/donald_sadoway_the_missing_link_to_... Edit: added link, minor fixes

jakarta 14y ago
I don't think Fred's investors want to be sinking money in renewable energy. If you look at the returns to that asset class, they've been pretty bad. It's great to do big things and change the world, but the pension funds backing Fred want to earn a good return.
- antr 14y ago
  "returns to that asset class, they've been pretty bad." Renewable energy assets have a pretty good IRR, in the mid-teens to low 20% - and even higher if you look at the 1995-2004 vintage. To any LP that is an above average return, in fact, it is above any equity return threshold for asset manager incentives/carry. Where did you get the data for you to say that "they've been pretty bad"?
  - lifeisstillgood 14y ago
    I always return to this bet with John Kay: http://books.google.co.uk/books?id=6BLqprHdwygC&lpg=PA151&ots=E7_TYv35xm&dq=undercover%20economist%20returns%20investment%20railways%20USA&pg=PA151#v=onepage&q=undercover%20economist%20returns%20investment%20railways%20USA&f=false http://books.google.co.uk/books?id=6BLqprHdwygC&lpg=PA15... returns for the most successful railroad companies were mere 5% - competition kept things down (although speculation in early years lead to phenomenal returns - if sold) However, a moderate VC return is 3fold over ten years - which is ~12.5% YoY (unless my maths is bad). But then that is 12.5% of millions and millions not just one company.
    - antr 14y ago
      I struggle to understand your point - I'd love to here a bit more to understand it. The IRR numbers I mention refer to UFCF/equity, i.e. no exit (hence return) via company/asset sale.
      - lifeisstillgood 14y ago
        That the return (assuming no sale at top of a bubble) for the best companies in the biggest industry of 19C was only 5%-10%. (Based on equity, it seems Harford did not calculate dividend return which may make a difference) Making 15-20% without an exit is a great deal - supporting I think your point.
        antr 14y ago
jeffool 14y ago
Being 31, growing up when I did, sometimes the things discussed in TED, and the wonderful future you allude to, seem like flying cars. And not to be down on you, or the future in general. Maybe this is a side effect of growing not only when I did, but where, being in more rural Georgia. Or being "not an optimist". That all aside, power storage really does seem key. Imagine if electric cars could be refueled by an easily accessible battery change out? And one imagines if everything is electric, then advances in any power generation tech transferable to electricity instantly gives advantage to everyone. Yeah, that future is a romantic one. But I just don't know.
- lifeisstillgood 14y ago
  Well, flying cars do exist: http://bostonherald.com/jobfind/news/technology/view/20220812flying_car_closes_in_on_faa_ok_terrafugia_already_has_more_than_100_orders_for_its_279000_aircraft http://bostonherald.com/jobfind/news/technology/view/2022081... To be less of a dick: I did put in a caveat of "if humanity wins" - my sort of catch-all term for avoiding the collapse of a global civilisation that arguably has been in existence since, well, Gutenburg, or possibly Newton. But the idea is that the available-at-one-point-to-one-socieity-sum of human knowledge has been only expanding since a given point (the burning of library of Alexandria would count as a net loss of knowledge so it does not go far back this idea), and that if it is to keep exapnding we are going to solve something. Maybe cancer, maybe flying cars. Maybe something else. But there are only two directions - up and down. I am hoping for the up. I can understand the doubt. We humans are real good at screwing it up. But ... I think the scientific method is permeating enough societies that even if Western world collapses, India, Brazil etc are likely to be independant civilisations themselves. (I have had pleasure of working with many Indian natives over here, and their generation is going to want some serious changes back home.)

jpkeisala 14y ago

Can one start a tech company anymore without Venture Capital?

GFischer 14y ago
Yes :) . Depending on your definition of tech, of course, there are several bootstrapped companies. Some examples include Github, Imgur, Carbonmade, 37Signals, Braintree, DuckDuckGo, AppSumo, Atlassian, Envato, etc, etc... There are also other sources of funding (ex: StartupChile), and that's not even counting angel investors.
- chimeracoder 14y ago
  I'd exclude Imgur, as last I checked, it wasn't making much money (perhaps even a loss?). Also, Github and DuckDuckGo both took significant venture funding from a16z and USV, respectively. They both grew a substantial userbase (and the former a revenue stream) before taking venture funds, which is a different model for venture funding than is popular today, but they both decided that they needed venture funds in order to realize their ultimate goal. On a related note, I would consider companies that are bootstrapped by fairly wealthy individuals/angel investors to be a separate class. They're still often backed by former founders of successful startups that had exits (so in some sense, they were able to fund their startup because of previous venture money). An interesting question is how many companies are founded by individuals with next-to-no capital and take no venture money at any point in their life cycle. It's a different question from the one that GP asked, but it's a far better metric for something we like to pride ourselves on in the tech community: mobility/meritocracy. We're definitely in a different place than we were in the 90s, when venture money was needed even to get basic server access (today we have plenty of IaaS/PaaS/SaaS companies that reduce the costs). Now, it's possible for someone to create the beginnings of the next Facebook on a student's budget. But that's different from being able to create the next Facebook on a student's budget (ie, without taking any venture money). I agree that there are still examples even with my stricter critera; they're just less common at the moment.
smackfu 14y ago
What's a tech company? There are certainly examples of small teams or single developers making a living from selling software on the various app stores with no VC funding.

stitchy 14y ago

I'm curious why Fred Wilson would proclaim to the world that investing in his VC firm isn't going to give you the return that you're looking for these days. Is there a short term gain for him that I'm not seeing? Or is Wilson genuinely trying to change an industries path with a few words of wisdom? I'm not suggesting that his advice is bad. It seems to make sense to me.

jusben1369 14y ago
One of us missed something here. I did not see Fred saying investing in his firm is not a good idea. I saw him talking about VC's in general having a poor return and thus putting investors on the fence. It's probably safe to assume that with Fred's profile and track record he's not personally struggling.
notatoad 14y ago
Maybe he's just trying to manage expectations?

mathattack 14y ago

Let the market decide this. My impression is that the average VC firm doesn't deserve the carry plus expenses. The great ones do. (And it's strange they all still charge the same variant of 2/20) So what will the market decide? I have no idea. But if the ex-Netscape/LoudCloud types can return good money to their investors, they will be trusted with more money. And this should continue. If they don't, the funding will dry up soon enough. The invisible hand will guide this, so there is no need to intervene. If 200 funds investing X dollars is better than 20 investing 10x, the returns will show it. If the status quo is somehow a disservice to innovation, then it becomes a national R&D funding issue rather than a VC issue.