Olson’s Observations

The subject of whether or not the VC model is broken has come up again so I thought I would weigh in. This time the New York Times started the discussion with an article discussing Sevin Rosen’s decision to abort the process of raising their 10th fund. The reason for the cancellation of Sevin’s 10th fund is summed up in a quote from General Partner Steve Dow:

“The traditional venture model seems to us to be broken…”

This is very interesting and intriguing for a couple of reasons.

1. Sevin Rosen is a very respected firm that has been around for a long time (25 years or so) so hearing them say that the VC is broken means a lot more to people than Fraser and I talking about it.
2. The firm had already taken somewhere between $250mm and $300mm in commitments for their fund meaning they had a lot of management fees coming to them.

Of course there are a lot of VCs who don’t think the model is broken. One of the first VCs to respond was Fred Wilson. Fred’s conclusion was that the VC model is not broken but just a model that needs to be tweaked. His suggested tweaks, which he says a lot of VCs, including himself, are already employing are as follows:

• Raise smaller funds.
• Do less “hard tech” and more “soft tech”
• Figure out how to make great returns on $100mm to $250mm exits
• Limit our IPOs to our very best companies

I totally agree with Fred on those points. In fact, I have talked about the benefit of smaller funds before (check out my post on <$100mm funds for more). However, I think that the New York Times article is referring to the “traditional VC model” which is… well, I don’t really know. My guess is that most people would disagree on what the traditional model actually is.

I think that the traditional model the New York Times was referring to is large funds looking to put a lot of money to work into companies that will generate high 9 to 10 figure returns through IPOs. This is exactly the opposite of what Fred calls for which leads me to this statement:

Perhaps Fred doesn’t think the VC model is broken because he is, in fact, one of the “new school” innovative VCs.

I happen to believe Fred is very innovative and what seems so natural to him doesn’t come natural to others.

VC funds themselves are not the only piece of early stage investing that is going through some changes. There are also other innovative trends happening now that are changing the game. One of those trends comes in the form of “advisory capitalists” or ACs. ACs put time to work instead of (or along with in some cases) money for a share of the company. They are basically a hybrid between a VC and a consultant.

There are some problems with ACs though like the fact that they probably won’t be able to put up money when the company needs it leaving the ACs piece of the pie vulnerable to serious dilution. However, the idea is interesting and new and that’s a good thing (check out my previous article on ACs). If you would like to read more about the innovative things that are happening in early stage investing please see Fraser Kelton’s post from earlier in the week that includes a nice summary of the new ideas including ACs.

In the end of the day there is definitely one thing that everyone can agree on though: It is a very exciting time for early stage investing. I, for one, am excited to continue watching the progression while hopefully contributing to it as well.

Update: It seems as if the reason Sevin Rosen gave for halting their latest fund (VC model is broken, etc.) has come into question.  VentureBeat is reporting that Sevin Rosen may have orchestrated a snow job on the New York Times and that the real reason for the halting of fund X was due to internal personnel issues.  Either way - discussing the venture model and how it may be tweaked to perform better is still important.