The Picky VC

The Picky VC: Thoughts on 2006 VC Macro Trends

Matt Miller — 2007-01-29T10:22:14-08:00

The latest PWC Money Tree data highlights a few trends we have been seeing over the last year or two. To cover a couple of the most salient:

The Picky VC: The VC Industry Should Return to its Roots

Matt Miller — 2006-10-12T10:47:48-08:00

So the talk of Sand Hill Road this week has been Sevin Rosen's decision to stop fundraising Fund X because they no longer believe that the venture capital model works. It has been pointed out that SR has had a series of poor performing funds (one source reports that Funds VII and VIII had returns of -27 and -13) so this may have colored their thinking. But that's not where I want to focus this column. The fact is that things do need to change in venture, and SR raises a valid topic.

The Picky VC: In Search of the New Tech Bubble

Matt Miller — 2006-07-28T10:04:54-08:00

I've seen enough magazine covers and newspaper columns with alarmist headlines about the "New Tech Bubble" to spend the last few hours studying the new PWC/NVCA Money Tree Report for evidence of trouble. The data goes back to the mid-1990's and should help us see evidence of a new bubble. If we were headed for a new industry collapse, one would expect to see rapidly rising investment dollars, spiraling valuations and unprecedented new company formation. Right? Isn't that what the pundits are suggesting when they use the New Bubble concept. So, I took a look at a number of indicators at three key points in time: Today (Q2 2006), the height of the bubble (Q1 2000) and pre-bubble (Mid 1996 - ten years ago). Let's see what we see.

The Picky VC: Open Source Apps - Sooner or Later?

Matt Miller — 2006-06-16T10:00:44-08:00

After all the feedback I received on my recent rant against the Web 2.0 term, I hesitate to embark on this column. While the vast majority of email I got was in violent agreement with my cautionary view of this dumb buzzword, I clearly struck a defensive chord with a small number of Web 2.0 zealots. At the risk of incurring the same treatment by those who have already placed bets on the near-term success of open source enterprise apps, I'd like to point out a few structural impediments to near-term mass adoption of these "products." Oops, did I upset the open source purists by calling them products instead of "projects?" Well, I hope they are products, since the CIO does not want to buy your cool work in progress. But I digress...

The Picky VC: Web 2.0 - Twice as Nice at Twice the Price

Matt Miller — 2006-05-27T10:54:07-08:00

OK, I must admit that after almost 20 years in Silicon Valley, every time I hear someone articulate a product or a market as "second generation" or "next generation," I cringe.

The Picky VC: And the Winners are...Media and Late Stage

Matt Miller — 2006-05-05T10:43:02-08:00

The numbers are in for Q1 2006 VC activity and the signs are pretty good for tech investing. Once again, there was no meteoric growth in volume, but instead, steady progress on valuation and deal flow. As I have written in the past, all VC's should rejoice every quarter we do not see a frothy spike in dollars or valuations. The one sure way to return to 2001 is to build back to an overheated venture market.

There were few clear trends in the data released by PWC and the NVCA, but a few items stood out for me:

VC's Want Their 15 Minutes
Media and Entertainment are finally attracting big VC dollars. This sector attracted 80% more dollars in Q1 2006 than Q4 2004. The estimated $386 million invested in Q1 is approaching the $447 million invested in semiconductors. This was unthinkable in 1989 when I came to Silicon Valley. At WaldenVC, we are active Digital Media investors and have seen many, many venture firms looking for their first few deals in entertainment. As an aside, the award for "overheated sector of the year" may be a tossup between mobile content and user-generated content hosting. I have been pretty shocked at the valuations on a few of these deals lately. Good segue way into the next section...

Paying Up for Late Stage
There are many theories bouncing around academia about how to invest in venture funds. One set of folks believes that early stage offers the best upside while another faction articulates the "bar-bell theory." The claim here is that you can make money in early stage or late stage, but that anything in between is a valley of death for investing. This theory is particularly popular when valuations rise and one needs to pay up for mid-stage investments with an uncertain future. Valuations rose in general last quarter, but late-stage average valuation jumped up to $92 million for calendar 2005, up from $72 million in the 12 months ended Q3 2005. That's a huge jump in one quarter. Given the IPO market looks anemic, this likely implies a confidence that companies with decent revenues can be acquired at good markups.

Don't look for this to change anytime soon. I suspect that some of the demand fueling the late-stage prices is coming from buyout and even hedge funds. These entities are new competitors to traditional venture capital firms. It may be that they have raised so much money that they are now hunting lower and lower in the food chain. They are not value shoppers, and they will continue to pay up. Look for more exits that are acquisitions by buyout funds.

Anyone got a late stage content company?

Matt Miller is a managing director at WaldenVC.