I have been consistent in my criticism of the combination of the traditional VC mindset and the Web 2.0 developer. The traditional VC mindset has been furiously trying to stuff Web 2.0 into the framework of the 1990s. These Web 2.0 developers, most of whom are not MBA types by training, are all too happy to have someone try to turn their glorified high school science projects into a billion or so dollars. It’s hard to blame them for dreaming.
The problem, of course, is that those billion or so dollars have to come from someplace. And one of the likely places is our pockets via IPOs that should never happen.
The result is that you have some old school VCs trying to find a billion dollar exit strategy where one doesn’t exist. Their efforts are, in turn, supported by a bunch of nincompoop bloggers, many of whom have skin in the game, talking about how many billions of dollars this site or that is worth, in the hopes that enough people will start believing their bullshit to cause Google to stupidly throw away more of its money and buy it. The fallback plan of course being to toss an IPO out there in the hopes that you and I, or more likely the people who manage our investments, will bail them out and make them richer and us poorer. That plan worked in the 1990s, when the average investor got caught up in the greed and hype of Bubble 1.0. Now, however, we have realized that the internet is not quite the evolutionary force we thought it was going to be, and that everything that touches the internet is not necessarily gold.
In sum, it is a system that may have worked in the 90s, but thankfully doesn’t work now. It’s a greater fool game without scale.
Today, Fred Wilson has a post about the future of the VC business. He asks “is the traditional VC model broken?”
His conclusion is that the VC model of the past will not work in the future. The business model is not broken he says, but it certainly needs to be modified in light of the changing technology business.
Fred understands that part of the problem was caused by the VC industry during Bubble 1.0:
The IPO market certainly isn’t what it used to be, because of Sarbanes Oxley, because of the really bad companies we in the VC industry foisted on the public markets in the late 90s and the long memories of institutional investors.
Part of what’s needed, according to Fred, is a little scale. Something I have typed about until my fingers hurt. Fred says:
Maybe they can’t get us the valuations “that venture investors expect”, but that is the venture industry’s fault because we’ve overfunded our companies to the point where we need a half billion dollar exit to produce a decent return.
Fred suggests a few tweaks, including that the VC industry figure out how to make great returns on $100 million to $250 million exits and limit IPOs to the very best companies.
All of that sounds like inspired gospel to me, even though I still think $100 million to $250 million is too rich for 98% of Web 2.0. Still, I wish I read more stuff like this in the blogosphere and less psychobabble about how valuable the latest YouTube clone or MySpace wannabe is.
The ironic thing is that the cheerleaders and con men who keep spouting off about billions and zillions and YouTube and MySpace and all that nonsense are doing the Web 2.0 space a lot more damage than good.
Good is smart and logical and reasonable. With a plan that actually makes sense.
That’s what Fred is talking about. And to that I say amen.
Tags: web 2.0, venture capital
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