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A Look At The Venture Capital World

from the to-seed-or-not-to-seed? dept

Fri, Dec 29th 2000 1:06pm — Mike Masnick

Here's a bunch of good articles looking at the venture capital world that suggest some conflicting conclusions. First, we all know that VCs lost out on lots of money from portfolio companies that couldn't go public. We don't feel bad, though, because for the most part, those companies shouldn't go public. However, what does this mean for brand new companies trying to get started? Some are suggesting that seed stage deals are drying up. However, another article points out that many big name investors are now focusing more on seed stage. The reasoning makes sense. There definitely are fewer seed deals because people are being more careful and picky. Many seed deals in the last 3 years never should have been done. However, with valuations dropping like crazy, the potential rate of return from smart seed stage investing goes significantly higher. Many smart investors suddenly see the value in seed investing again - since they can get in at great valuations. So, both articles can be correct. Fewer deals are getting done, but it's more lucrative for the smart investor.

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Anonymous Coward, 30 Dec 2000 @ 12:05pm

risk and return
Mike, interesting comments, but one thing you might have left out: Seed valutaions have dropped, that's correct, but they have dropped far less than public market valutations for high tech companies. Toghether with the present unliklyhood of successful IPOs in this space (with a very few exceptions), early stage investing has become more risky with less return. And the big law of risk and return tells us that this is a bad deal for the investor.
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Mike (profile), 30 Dec 2000 @ 1:40pm

Re: risk and return
You make a good point... so let me clarify. As I said in the post, "smart" seed stage investing can be more lucrative. I don't deny that it's become more risky. However, the potential rewards have suddenly become much greater. So, that offsets the risk. If you do have a successful return, you're getting back a lot more. Every investor knows that they're taking on some amount of risk that their money is going straight into the trash heap. That's why they spread it around hoping to hit it big with just a few investments which cover the cost of their failures.

The smart investor invests in companies that are more likely to give some sort of return (and that doesn't have to be going public - it could be acquisitions). Also, the fact that seed stage companies have a longer timeline (and finally, that seems to be true again), there's a much better chance that the IPO market may have bounced back as these companies mature.

So, yes, they've certainly become more risky, but it's a calculated risk, and obviously some of these big name investors have done the calculation and believe the potential rewards outweigh the risks, when the valuations are so low. I tend to agree with them.

So... I don't see how this is a "bad deal" for the investor. Just because the IPO market sucks now, doesn't mean that all investments that are done today will fail.
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