Saturday, October 07, 2006

Sevin Rosen Scraps Fund: VC Business All Risk and No Return

There was a time when a fool and his money were soon parted, but now it happens to everybody. - Adlai Stevenson

This weekend's NY Times reports Venture Capital firm Sevin Rosen is offering a refund.

“The traditional venture model seems to us to be broken,” Steve Dow, a general partner at Sevin Rosen Funds, said in an interview.

Sevin Rosen, a 25-year-old firm that is among the most respected in the industry, was in the process of closing its 10th fund and had received commitments from investors for $250 million to $300 million, Mr. Dow said. But in a letter sent to those investors yesterday, Sevin Rosen said it had decided to abort that process.

“We have decided to take the radical step of returning the commitments you have given us for Fund X,” the firm wrote.

Explaining its decision, Sevin Rosen, which has offices in Dallas and Silicon Valley, said that too much money had flooded the venture business and too many companies were being given financing in every conceivable sector.

But excess of capital is only part of the problem, the firm said. In its letter, it bemoaned what it described as “a terribly weak exit environment,” a reference 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.

At a time when young companies like 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.

“While good returns from any given firm’s portfolio is certainly a possibility, the statistics have clearly shifted in an unfavorable direction,” the firm wrote. “The venture environment has changed so that overall returns for the entire industry are way too low and even the upper-quartile returns have dropped to insufficient levels.”

VC funds, PE funds, Hedge Funds. Sevin Rosen is telling us the world is afloat in liquidity. But it's not really an issue of doing an IPO at the back end. It's the inflated price too many investors are willing to pay on the front end.

If you can't get a good entry point, figuring out a good exit point becomes moot.

Gone are the days when VC's got in on the ground floor. There's been a Katrina-like surge lifting the big boats, small boats, flotsam, jetsam and rubber duckies. So much so we find ourselves reading Google might buy YouTube for $1.6 Billion (of course they're using Google Monopoly Money).

The markets have a lot of smart folks scratching their heads these days. In the future we'll look back and wonder, "What we're they thinking?!"


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