

Fred Wilson says venture capital funds have gotten too big - kevinpacheco
http://www.technologyreview.com/qa/428869/fred-wilson/

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brackin
"Lately VCs haven't come close to generating the returns on their investments
that made them stars in the 1990s."

That's because it was in the height of the internet bubble. Companies have to
work harder and show real revenue. People may not believe it but the recent
IPO's have shown this. Tech companies have to show revenue and progress other
than traffic .

Companies are springing up that do more than social networking. In the 90's
there were many of these crazy ideas but there were no consumers to use them
so the valuations were out of whack. I think we're going to see some more
ambitious companies coming out. Simple, Square and Uber are the first step.

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mathattack
Let the market decide this. My impression is that the average VC firm doesn't
deserve the carry plus expenses. The great ones do. (And it's strange they all
still charge the same variant of 2/20)

So what will the market decide? I have no idea.

But if the ex-Netscape/LoudCloud types can return good money to their
investors, they will be trusted with more money. And this should continue. If
they don't, the funding will dry up soon enough. The invisible hand will guide
this, so there is no need to intervene. If 200 funds investing X dollars is
better than 20 investing 10x, the returns will show it. If the status quo is
somehow a disservice to innovation, then it becomes a national R&D funding
issue rather than a VC issue.

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stitchy
I'm curious why Fred Wilson would proclaim to the world that investing in his
VC firm isn't going to give you the return that you're looking for these days.
Is there a short term gain for him that I'm not seeing? Or is Wilson genuinely
trying to change an industries path with a few words of wisdom? I'm not
suggesting that his advice is bad. It seems to make sense to me.

~~~
jusben1369
One of us missed something here. I did not see Fred saying investing in his
firm is not a good idea. I saw him talking about VC's in general having a poor
return and thus putting investors on the fence. It's probably safe to assume
that with Fred's profile and track record he's not personally struggling.

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lifeisstillgood
VCs are not too big, they are (apparently) investing in the wrong companies.

If humanity overall wins out, the next 20-30 years will see industries we can
barely imagine grow to maturity. From electric driver-less cars, to new forms
of power generation (even fusion), new building methods, new education, and
vast mega-cities will spring out of nowhere.

In the West, in the rest of the world, we will see vast demand for things that
are barely off the drawing board. And they will need support industries,
innovating widgets and helpful doo-hickies.

All of which will take specialised knowledge, innovation and investment. Just
what VCs are supposed to do.

(PS I strongly suspect Fred Wilson already knows this, is intelligent enough
to be hiring clever VCs in India, China Sudan, and doing presumably cleverer
things than I suggest.

But it annoys me that the article seems mostly - oh no! cloud is cheap, so
there are no companies anymore anywhere in the world that need high risk
investment. Gaaahh!)

Here is one that is a perfect example:
[http://www.ted.com/talks/donald_sadoway_the_missing_link_to_...](http://www.ted.com/talks/donald_sadoway_the_missing_link_to_renewable_energy.html)

Edit: added link, minor fixes

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jakarta
I don't think Fred's investors want to be sinking money in renewable energy.
If you look at the returns to that asset class, they've been pretty bad.

It's great to do big things and change the world, but the pension funds
backing Fred want to earn a good return.

~~~
antr
_"returns to that asset class, they've been pretty bad."_

Renewable energy assets have a pretty good IRR, in the mid-teens to low 20% -
and even higher if you look at the 1995-2004 vintage.

To any LP that is an above average return, in fact, it is above _any_ equity
return threshold for asset manager incentives/carry.

Where did you get the data for you to say that _"they've been pretty bad"_?

~~~
lifeisstillgood
I always return to this bet with John Kay:

[http://books.google.co.uk/books?id=6BLqprHdwygC&lpg=PA15...](http://books.google.co.uk/books?id=6BLqprHdwygC&lpg=PA151&ots=E7_TYv35xm&dq=undercover%20economist%20returns%20investment%20railways%20USA&pg=PA151#v=onepage&q=undercover%20economist%20returns%20investment%20railways%20USA&f=false)

returns for the most successful railroad companies were mere 5% - competition
kept things down (although speculation in early years lead to phenomenal
returns - if sold)

However, a moderate VC return is 3fold over ten years - which is ~12.5% YoY
(unless my maths is bad). But then that is 12.5% of millions and millions not
just one company.

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antr
I struggle to understand your point - I'd love to here a bit more to
understand it.

The IRR numbers I mention refer to UFCF/equity, i.e. no exit (hence return)
via company/asset sale.

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lifeisstillgood
That the return (assuming no sale at top of a bubble) for the best companies
in the biggest industry of 19C was only 5%-10%. (Based on equity, it seems
Harford did not calculate dividend return which may make a difference)

Making 15-20% without an exit is a great deal - supporting I think your point.

~~~
antr
Indeed, I agree. I'd be curious to know how common was the use of debt during
that period. 5%-10% is a good return on an unlevered asset, debt could provide
an additional turn - then, I don't know how the Kd and CPI was during that
period.

~~~
lifeisstillgood
During the 19th Century, U.S. railroads relied primarily on debt issues to
finance their growth. This policy contributed to major financial crises
(www.biu.ac.il/soc/ec/wp/16-01/16-01.pdf)

Is that what you mean - or derivatives?

~~~
antr
just wanted to know - now it's clear

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jpkeisala
Can one start a tech company anymore without Venture Capital?

~~~
GFischer
Yes :) . Depending on your definition of tech, of course, there are several
bootstrapped companies.

Some examples include Github, Imgur, Carbonmade, 37Signals, Braintree,
DuckDuckGo, AppSumo, Atlassian, Envato, etc, etc...

There are also other sources of funding (ex: StartupChile), and that's not
even counting angel investors.

~~~
chimeracoder
I'd exclude Imgur, as last I checked, it wasn't making much money (perhaps
even a loss?). Also, Github and DuckDuckGo both took significant venture
funding from a16z and USV, respectively. They both grew a substantial userbase
(and the former a revenue stream) _before_ taking venture funds, which is a
different model for venture funding than is popular today, but they both
decided that they needed venture funds in order to realize their ultimate
goal.

On a related note, I would consider companies that are bootstrapped by fairly
wealthy individuals/angel investors to be a separate class. They're still
often backed by former founders of successful startups that had exits (so in
some sense, they were able to fund their startup because of previous venture
money).

An interesting question is how many companies are founded by individuals with
next-to-no capital _and_ take no venture money at any point in their life
cycle. It's a different question from the one that GP asked, but it's a far
better metric for something we like to pride ourselves on in the tech
community: mobility/meritocracy.

We're definitely in a different place than we were in the 90s, when venture
money was needed even to get basic server access (today we have plenty of
IaaS/PaaS/SaaS companies that reduce the costs). Now, it's possible for
someone to create the _beginnings_ of the next Facebook on a student's budget.
But that's different from being able to _create the next Facebook_ on a
student's budget (ie, without taking any venture money).

I agree that there are still examples even with my stricter critera; they're
just less common at the moment.

