howard anderson,

a founder of battery ventures and yankeetek ventures (which pulled the plug on its second fund), recently wrote the following goodbye to the vc industry in the mit enterprise technology review.

he makes the following points (followed by my take):

"Innovation is not dead, but demand for new technologies is moribund and will continue to be weak for at least the next five years."

yes, but early-stage vcs look at 7-10 year investment cycles for their companies, and so the it trough we're currently in is short-term; there's no telling what the technology landscape will look like ten years from now.

"...few software and communications companies will enjoy the double-digit growth that inflames company valuations and makes VCs rich."

also true, but this is what separates the successful vcs from the unsuccessful ones: the former will be able to identify, invest in, and exit those companies that will exhibit double-digit growth and deliver outrageous ROIs. this is why vcs get paid the big bucks. 1995 - 1999, the period when it seemed like every vc was minting money, was an anomaly. prior to that period, the environment was as it is now: very few winners, a lot of losers. this is just capitalism as it's supposed to be.

...the financial markets for technology companies are no longer exuberantly irrational. VCs hate rational markets..."

no, dumb vcs hate rational markets. good vcs anticipate the rationality, and only invest in companies that will create real value. those vcs that depend solely on the markets to behave irrationally are the ones that won't survive, in the long-run. the irrationality of financial markets is no thesis for investment.

"... these changes in venture funding are structural, not cyclical..."

wrong. as dan primack wrote in PE week wire, "Where Anderson crosses the line, however, is in his assertion that such changes are structural, rather than cyclical. In fact, the one flaming piece of information gleamed from the bubble inflation and collapse was that cycles are an ingrained part of capitalistic economics (at least the American version)."

"There's too much venture money pursuing too many deals. There's nowhere for all that money to go: we can't spend the money we've raised."

true, with the following caveat: there's too much dumb venture money chasing too many deals. the smart money will always find a way to make it into good companies. the guys at google, did they accept capital, willy-nilly, from any vc willing to listen to their pitch? not at all: they sought out the smart money, and the smart money made a bet. sometimes the smart money wins, sometimes it loses, but smart money, on average, will find better deals.

howard anderson has an enviable record of venture investing, and i can only hope to become as prominent as he was in the venture world. his post, however, smacks of resignation: howard, i don't think it's as bad as you want to think it is. i was just a junior guy at a small venture fund, but even i know that, in a healthy market-driven, capitalistic economy, there will always be opportunities for smart money to do its job: help good companies get better.