Sevin Rosen: Venture Capital is Over

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.

Related posts:

  1. The Venture Capital Coffin
  2. Zombies at the Venture Capital Roundtable
  3. The Venture Capital Crisis
  4. Pouring, Drinking, and the Allocation to Venture Capital
  5. Ripping the Future of Venture Capital

Comments

  1. Paul says:

    This reminds me of Howard Anderson’s whining when he torpedoed YankeeTek. Once-great firms flail away for a few years, and then blame the market structure and not themselves.
    I do believe there is too much money and the exit opportunities are weak, but that’s only a problem if you raise too much money and throw it at the same deals/sectors as every other Bay Area VC. Stay small, raise $50-100m at a time (eg Khosla, Tugboat, etc.), you can afford to be picky, and do well regardless of what the rest of the market is doing.

  2. Motts McGregor says:

    SPIN ALERT!
    Well now that the word is out, I suggest you do a little more digging into this instead of swallowing the PR hook, line and sinker (and I agree with you that the 90s venture model is “dead” or at least partially!).
    I hear one SR GP was thrown overboard and another has just jumped ship to one of the top two Valley VC firms (you’ll see him surface soon — rather not disclose any exact specifics for sake of propriety).
    The SR guys were majorly exposed if they didn’t even have their GP group lined up for Fund X while raising money — despite the gold-plated brand name.
    I’m sure a lot of LPs were already puzzling over “who is here now that was here when they last made us good money?”.
    This is called spinning a bad situation into as graceful an exit as they can get.
    -Motts

  3. Thanks Motts. I didn’t buy the spin. As I said, there are at least two views of this, one of which is much as you describe.
    On the other hand, the absence of long-standing GPs hasn’t been much of a barrier at other firms raising money recently. Look at KP, where Doerr and Byers are really the only marquee GPs standing with Khosla et al., gone. Didn’t hurt their fund-raising.

  4. Maybe “horribly broken” is the wrong term. “Mature” may be more apt. Whether you’re in steel, retail, or venture, it’s easy to make money in a massive growth industry but when the market tops off the S curve it becomes: Get Big, Get Small, or Get Out.
    Just like those less sexy industries, the Walmarts will grow and dominate but plenty of niche funds will focus and make great money. Just don’t get stuck in the wayward middle.

  5. mike says:

    I think this is clearly a case of a firm past its prime finally imploding. That said, it’s my understanding (and I did a lot of work on this fund before passing) that they were actually able to raise the fund. If this is true true then the NYT story (and “spin”) has substantially more credibility.

  6. nick gogerty says:

    The venture model isn’t broken, but the software component may be. The economics of web based software seem to lend themselves more to an entertainment model with a binary outcome. develop a pilot and see if its a hit. Venture at $3-10m is a bit heavy on the front end for that and exits are a bit thin on the backend for these businesses, that may be $20-$100m cap firms.
    But risk capital is always needed and scientific innovation in feilds such materials sciences and other applied technologies still offer big bets and big outcomes. Still the wall of money out there means prices are steep and deal flow poor. Maybe moving to Europe and doing later stage Tech transfer deals is more appealling.