I really enjoy reading Robert Cringely. I’ve blogged that before so I won’t repeat the reasons I love reading him.
I will repeat that Cringely needs a blog. This email, then click on a link, then read a static web page just sucks. It’s old school. I can’t even find an RSS feed on his site.
Enough about Cringely, the point of this post is to respond to some very interesting comments he made in his most recent piece on Carly Fiorina, the cell processor, and the VC business. I’ll leave Carly and the cell alone and focus on his comments on the VC business.
Cringely says the following about the VC business:
the VCs are sitting on a boatload of uninvested cash that they simply must spend. Get ready for a return to 1998 because soon you will be able to get funding for almost any hare-brained scheme. And while this process of throwing money at the wall is grossly inefficient, it inevitably leads to rapid change.
He goes on to say this:
In 1999-2000 — at the very peak of the dot-com boom — venture capital firms were not only taking companies public at a furious pace, they were just as furiously raising new venture funds — funds that will shortly be coming to the end of their lives. Throughout the fixed lifespan of these funds venture capitalists are typically paid 1-2 percent of the total fund per year as a management fee. If a VC raises $100 million for a fund with a six-year life, they’ll take $2 million every year as a management fee, whether the money is actually invested or not. Any money that remains uninvested at the end of the fund must be returned to the investors ALONG WITH THE ASSOCIATED MANAGEMENT FEE.
Right now, there is in the U.S. venture capital community about $25 billion that remains uninvested from funds that will end their lifespans in the next 12-18 months. If the VCs return those funds to investors they’ll also have to return $3 billion in already-spent management fees. Alternately, they can invest the money — even if they invest it in bad deals — and NOT have to cough-up that $3 billion. So the VCs have to find in the next few months places to throw that $25 billion. They waited this long in hopes that the economy would improve and that technical trends would become clear so they could do their typical lemming-like jump off the same investment cliff as all the other VCs. Well, we’re at the edge of the cliff, so get ready for the most furious venture investing cycle in history.
I said in my prior post that Cringely is "mostly right" and he’s mostly right about this, but not totally right.
It is true that there is a huge "overhang" of venture money left over from the 1999/2000 fundraising binge. But that money can’t go into early stage deals because those deals take 5-6 years to turn into realizations.
The early stage market may also be entering a "furious investing cycle" but that’s not being driven by the overhang from 1999/2000, its being driven by Web 2.0 and the realization that we have entered another wave of innovation around the Internet that will result in a lot of interesting companies being created, built, and sold over the next several years.
We are not happy about the "furious investing cycle" we find ourselves in and we are going to be cautious about it. We’ve lived through the rapid increases in value, the overcapitalizations, the IPOs in less than a year, and the "get big fast" mantras. We’ll leave those to others and try to find a few good entrepreneurs a year that want to do it traditional way, to walk before you run, to build a business efficiently, and to focus on profits in the business before profits in the markets.