Venture capital firms are closing, decreasing the size of funds, or dropping partners, as a result of a worsening marketplace for start-ups to get to liquidity. As a result, the VC firms are finding it harder to raise money to invest:
Pui-Wing Tam, Venture Firms Take a New Tack
U.S. venture-capital funds garnered $20.3 billion in 2012, essentially flat from 2011 and down from $39 billion in 2007, according to Dow Jones LP Source.
Overall, there were 842 venture-capital firms in the U.S. in 2011 that raised money in the previous eight years, down 16% from 1,004 in 2007, according to the National Venture Capital Association.
More venture firms “realize that in order to be successful and deliver returns, they need to be focused on smaller groups of people and smaller sets of companies,” said David Hornik, a venture capitalist at August Capital, which in October closed a $300 million fund, compared with $350 million for its previous fund. Six partners are investing out of the new fund, down from seven for the prior fund, he added.
Many venture firms are responding to a higher bar from investors, who have been disenchanted with scant venture returns and are scrutinizing partnerships closely to pick out the stronger versus weaker venture capitalists in a firm.
Investors “have become more selective because their return requirements are higher.” said Tom Gladden, a partner at investment management firm Adams Street Partners, which invests in venture funds. “We’re going to evaluate the [venture firm’s] team to the point of looking at the personal franchises of individual partners.”
What is unsaid in this story is that investors the world over are finding it harder to determine where to invest. Uncertainty and ambiguity make it difficult to pick sectors or investment vehicles — like start-ups — with anything like a dependable return.
Michael Arrington announced recently that he’s starting a VC fund, so AOL has announced that he will be ‘replaced’, presumably to distance him from writing about his investments.But he will continue writing there. Presumably not about the companies he’s invested in? Very blurry. Especially blurry because apparently AOL is the biggest investor in the fund, according to Dan Primack. Huh?
But I thought Arrington was only the founder of Techcrunch these days, and that he had handed over CEO control years ago to Heather Harte? His profile at Crunchbase does not mention editorial duties, but the Techcrunch profile lists him as co-editor with Erick Schonfeld.
In a move that will likely damn him, I think that Erick Schonfeld is a great editor and writer. I can’t imagine why they wouldn’t offer him the editorship, but apparently Arianna doesn’t want to:
Nicholas Carlson via Business Insider
Eric Schoenfeld will takeover Arrington’s management duties in the interim.
We thought that Arrington hasn’t really been the managing editor TechCrunch for a long time now – that such a role belonged to Schoenfeld already.
Shouldn’t Arrington just start a personal blog like every other VC? Whatever.
Perhaps Schonfeld is looking around for a different gig, though, considering how badly AOL’s transition into a media company is doing.
Claire Cain Miller seems to hold up color.com as a cautionary tale. Is the market getting bubblicious? Looks like it in Cali. I think NYC is more prudent.
Tom Evslin has an interesting post about his recent experience at Wikipedia, where he had created an entry on Advisory Capital (yes, the term I coined a month or so ago) that was “speedily deleted” because of anti-blog bias:
[from Wikipedians vs. Bloggers]
But Wikipedia is somewhat schizophrenic when it comes to blogs.
I realized this shortly after I created a Wikipedia article on advisory capital (a term Stowe Boyd introduced and many blogs are discussing) when the article suddenly disappeared. “WTF?” I asked myself.
Turns out that it was “speedy deleted” by a Wikipedia editor (there is such a thing – something like a sysop on a message board used to be). The reason given was “lack of context” which basically means the topic was made up out of the blue. The deleted article list pointed to the deleted article policy which told me how to appeal a deletion. I did.
Tom goes into the back-and-forth of his descent into the seven circles of wikipedia, and concludes:
The example of “advisory capital” is a trivial one but a good illustration. Within a few months use of the term “advisory capital” will either have died out or been picked up by the traditional media. According to some interpretations of Wikipedia policy, the article will become appropriate once the term appears on a dead tree. The irony is, of course, the traditional media will have picked the term up from the blog discussion which Stowe Boyd started.
Obviously blogs are authoritative and verifiable as a source for what is being discussed on blogs – the claim I’m making for advisory capital. But it is an oxymoron for Wikipedia to disdain self-published information on any subject. Sure, most individual bloggers (including me) have earned little public credibility. Individual contributors to Wikipedia don’t have individual credibility either. But the aggregate of the information and opinions presented on blogs or Wikipedia articles is an extremely useful source. There isn’t much difference between bloggers and Wikipedians.
One of the many strengths of Wikipedia is that everything including policy is open to discussion (altho Wikipedia disclaims being a democracy). Searching for my missing article and the reasons for its demise, I joined the WikiProject on Blogging to better integrate Wikipedia and blogs. You can join or lurk as well if you’re interested.
The discussion on whether or not to delete the advisory capital article is here. Not sure how that’ll come out (only one vote to keep so far) but I’m more concerned with the overall issue of blogs as one of many useful types of source than with this particular article.
I in particular liked Tom’s recommendation to the Blog Wikipedia project to counter the bias against blogs and level the playing field with other media:
I have added a proposal to the blog wikiproject that an acceptable measure of current notability be the appearance of an article subject with a high technorati rank (or other measures of blog attention). Note that this does not make blogs an authority except on the subject of what’s being discussed - and does avoid narrow or vanity articles.—Tevslin 20:06, 22 March 2006 (UTC)
The whole thing is surreal, for me, since I am in the early stages of planning a one day summit on the topic of Advisory Capital (about which more later), and have been talking about the concept with dozens of people. This flap at Wikipedia makes for a strange backdrop to that.
There has been a great deal of discussion in the tech community about the changing needs of Web 2.0 tech startups. When the underyling economics of innovation have shifted so drastically — cheaper high-powered servers, open source LAMP stack, accelerated development tools and techniques (AJAX, Ruby, Php, etc.) — more and more companies can bootstrap from pocket change, and be up and running in less time than it takes to secure capital. As a result, going the VC route is increasingly seen as a brake on this class of tech innovation, not an accelerator, at least in the very earliest stages.
But the needs of today’s start-ups for quality advice and guidance has not changed, but because the VCs have a harder time getting involved — they aren’t geared to make <$50,000 investments, generally — small start-ups are left with a variety of options to fill the advisory gap since they don’t have VCs advising them:
It is this last option that I have had the most experience with recently, since I have spent most of my time since 1999 blogging about new technologies, particularly those with a dominant social orientation, and in recent months I have spent most of my time as a consultant working with small start-ups.
But the basis of involvement in this shifting territory — the area between the consulting authority, and the advice-hungry innovators and entrepreneurs — has to be rejiggered to better account for the needs of both parties. Pure play consulting may not be workable any longer, because the potential value of the involvement of a specific consultant cannot be accurately determined at the start of an engagement. A consultant is unlikely to want to part with a strategic concept that could make a client into a $100M player, potentially, in exchange for a per diem and the possibility of some downstream consulting, maybe, if you’re lucky. And the best results may not come from a few days of consulting, but a long-term strategic involvement, like venture capitalists typically make in their portfolio companies, the expense of which small companies have historically been unwilling to take on.
What I think is needed is a fusion of the best of both the venture capital and advisory board models. I call this Advisory Capital:
So, along with coming up with a term to put on the business cards that I have yet to order, I believe that the concept of advisory capital may clarify some of the issues swirling around about the potential conflicts that confront leading authorities — especially prominent bloggers and others in the public eye — relative to their making public comments about companies that they are affiliated with:
This also suggests another thing for venture capital firms to do: rather than trying to focus on how to reorganize to invest smaller and smaller sums into more and more companies — and thereby diluting their involvement — they need to jump from investing cash to investing advice. This would allow them to vet dozens of very early stage companies, and cherry pick the most likely contenders for future success, even if they didn’t need cash at all yet.
Alternatively, as some of my existing portfolio of advisory capital clients are acquired, go public, or start paying me dividends, I might start investing hard, cold cash on top of the hard, cold advice I am doling out. Or potentially, I could take on investment for my company, A Working Model, in effect making my advisory capital investment fungible. I could wind up backing into a situation where the primary asset of A Working Model is the stake it holds in its various advisory portfolio companies. So, the world of advisory and venture capital may start to overlap, and blur, becoming two halves of the sphere of involvement that drives high tech innovation.