UPDATED 20:36 EST / APRIL 29 2009

No Money Flowing – Dixon Doll and Dan Primack on CNBC Talking Venture Problems & Solutions

My friend Dan Primack has a blog post on the problems and solutions for venture capital. More interesting is Dan’s appearance on CNBC with Dixon Doll a very well respected VC. I appreciate Dixon because he built up his own VC business from the ground up. I am in the same situation here at SiliconAngle. It’s very hard especially in this market.

Many of the VC problems have been documented by me over the past 2 years, but now the entire industry is in trouble.

No liquidity is drying up the entrepreneurial landscape. It’s likely that the next big company (e.g. Cisco of the 80s) will die before it is even born.  Silicon Valley knows this, and that is why Dixon Doll and other elder statesmen are out pushing for changes.

I see first hand this problem.  I see so much deal flow going no where – it’s pathetic.  Personally, I have half dozen projects going on in SiliconAngle Labs and three projects that are fundable in the fastest growing market social networking and Infrastructure 2.0.  What are the chance for funding in this market – low.  Why there is money out there right?.   Yes there is money but, it’s just a weird environment.  It’s actually easier to just go out and make money to fund the startups via consulting and selling expertise.   Said another way it’s easier to just bootstrap the business and forgo the funding altogether.

Internet companies have that low capital thresholds so I have that option.  Other ventures need larger seed financing and they don’t have any other options so they can’t even get off the ground.  This is the bigger problem.

Anyway enjoy the video of Dan Primack and Dixon Doll talking VC reform.

Dan has some interesting Angles on the current situation on his blog.

But let me also make a few additional points:

1. One of the biggest problems for VC-backed IPOs is that the public markets require actual cash-flow. Often it even wants profitability (gasp). Venture capitalists may find such requirements short-sighted — after all, an unprofitable company can still become a great investment — but they were largely borne of VCs pushing an abundance of crap into market during the dotcom boom.

2. Speaking of those “glory days,” they were the exception when it comes to VC-backed IPO volume. Just take a look at Page 6 of the NVCA presentation. What you’ll notice is that VC-backed IPO volume for most of this decade has mirrored VC-backed IPO volume during much of the 1980s (when companies like Dell went public). Sure there have been fewer than 10 VC-backed IPOs since the beginning of 2008, but that’s obviously more recessionary than systemic.

3. One more note on the late 1990s: Capital gains rates were higher than they are today. As such, I simply don’t buy NVCA’s argument that the “carried interest as ordinary income” proposal will have much impact on the VC-backed IPO market. (note: carried interest is taxed at just 15% today, and I don’t see VC-backed IPOs flying off the shelves).

4. Finally, the NVCA is trying to make both a macro-economic case (most VC-backed company job growth comes post-IPO) and a VC industry case (IPOs produce best returns for investors). And both cases are sound. That said, most VCs I know have given up on making investments with an IPO in mind. Instead, they want to help their companies build with an eye toward eventual trade sale. Not that an IPO is ruled out, but it’s more a dream than anything else.

Let me use a tortured baseball analogy: A general manager tries to get a guy who hits lots of homeruns to bat cleanup. The hope is that he’ll end of hitting grandslams, but you don’t sign a guy who “hits grandslams” — because that’s mostly a question of circumstance. Same goes for VCs, with trade sales as homeruns and IPOs as grandslams.


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