In what will be one of the most talked-about moves in recent venture-capital history, the folks at Sevin Rosen, one of the best-known venture capital firms, say they have decided to return all commitments for what would have been their latest fund. It would have been SR’s tenth fund, with supposed commitments on the order of $250-300m.
But as the fund’s partnership put it in a letter Friday to investors, “We have decided to take the radical step of returning the commitments you have given us for Fund X.” Why? Because it thinks the venture business is horribly broken. SR argues that venture has too much money, too few exits, and it generally believes the odds don’t favor a return to form for the venture industry in the near future — so it saw no point in raising a tenth fund and just waiting and hoping.
This is noteworthy stuff, especially when you consider SR’s pedigree. It backed some of the biggest successes in technology — companies like Compaq, Lotus, and Cypress Semiconductor — and made a lot of money for its LPs, but now it is saying “no mas”, at least for a while.
And so, what is the partnership going to do? Continue investing, but at a slower pace and only from previous funds. In the meantime they are going to muse about what to do in the transformed venture business:
“Maybe there are different financing structures,” [partner Steve Dow] said. Maybe we have to look at fund sizes. Maybe we have to look at only doing deals that are going to take a limited amount of capital.”
Critics will say that SR’s best days are past, and this is more about pining for the days of yore. To that way of thinking, this could even be taken as a contrarian signal for venture, with a branded firm out of step with its market and its LPs. After all, most of SR’s highest returns were relatively long ago, so this could certainly be viewed as simply spinning a bad situation.
Possibly, but many other partnerships will still nod knowingly, recognizing all the same problems in their own portfolio and their own investing. Venture does feel broken in many ways. And so GPs will all be hoping like hell that they can come up with good answers when their investors throw SR’s decision back in their faces the next time they are out fund-raising.
[Update] This post, and the NY Times article itself, has sparked lots of good debate. Just to throw a few data points into the mix, I’m told by an emailer who should know that SR’s last three funds have been poor performers. Let’s give the most recent fund’s poor performance a pass for being “too soon to know,” but Fund VII and Fund VIII apparently delivered -27% and -13% IRRs, respectively.
So, performance has played a part, but the SR partnership wouldn’t deny that. The difference is where you lay the blame. Is it with the partnership, with a market cycle, or with the venture industry itself? The Time articles make it clear that the SR partnership thinks the trouble is mostly with the venture industry, and secondarily with current cycle — call it a 70/30 split, which is where I part company with the Times/SR spin on the Fund X withdrawal.