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May 17, 2005

A VC Calls It Quits

Justin Hibbard

Howard Anderson, co-founder of Boston VC firms Battery Ventures and YankeeTek Ventures, is quitting the VC business. In the June issue of MIT Technology Review, he has published an apologia of sorts explaining his decision. In characteristically left-brain fashion, he lists five reasons why he believes the VC business is broken for good. The most interesting one is number four: "These changes in venture funding are structural, not cyclical." In other words, VC is not just at the bottom of a bad business cycle that will inevitably turn up. The bottom is the new normal.

Of course, that's what people said at the top of the Internet bubble (this time, it's different--really!). Remember how the "new economy" was supposed to be a structural change? Business cycles are forces of nature that progress regardless of what we mere mortals do or say. Still, Anderson supports his claim with some interesting points. To wit:

It takes about $30 million to get a startup software company to break even--and even great software companies rarely grow more than 100 percent a year. In irrational times, a software company with $30 million in sales would have been worth $180 million, or 600 percent of a VC's investment. Which is good, but not great. Unfortunately, in rational times, the company would be worth $47 million to the investors, or only 157 percent of their investment. But that's over five years! Per year, it's a return of only 11 percent--and that's for a winner.

Another interesting reason why Anderson is quitting: "The hype machine is broken." Technology sellers have used up all their best jive-talk, and buyers no longer believe them. Remember how Y2K was going to bring Armageddon unless corporations shelled out for new systems? Remember how Amazon.com was going to put Wal-Mart out of business unless Wal-Mart went dot-com? Those tall tales helped fuel a backlash that was summed up in Nicholas Carr's infamous Harvard Business Review essay, "Does IT Matter?" Today, there are few compelling reasons--true or fabricated--for companies to make major investments in tech.

Finally, Anderson echoes comments made recently by Norwest Venture Partners general partner Promod Haque (who, as far as I know, has no plans to quit VC). There are too many VC firms funding too many companies, and there's not enough demand for those companies' products.

Is this a case of sour grapes, or is Anderson on to something? Submit your comments, please.

10:28 PM

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» "The hype machine is broken" from Rough Type: Nicholas Carr's Blog
A VC tells the truth about IT. [Read More]

Tracked on May 18, 2005 10:49 AM

» So Long, and Thanks for All the Carried Interest from robhyndman.com
Howard Anderson, co-founder of Boston VC firms Battery Ventures and YankeeTek Ventures, has decided to leave the VC business and has written about the reasons why. In brief: First, technology supply is bloated. Innovation is not dead, but demand f... [Read More]

Tracked on May 21, 2005 05:16 AM

» Intellectual Happy Hour from Opine Online - The Rubicon Blog
Could this be any weaker? Sorry, Howard. No one likes a quitter. [Read More]

Tracked on May 24, 2005 07:49 PM

Comments

Dude sounds totally bitter.

Is the problem more so that there are not enough good quality investments to be had instead of not enough people to buy the products? If the product is good, people will buy it. Look at the pet rock.

Posted by: Spaceman Spiff at May 18, 2005 11:24 AM

I'm still digesting Anderson's full article, but here's a quick comment... Faced with an evolving environment, a dinosaur calls it quits. Yes, it's true that future opportunities for large-scale dinosaurs and other reptiles are evaporating, but that says nothing about the future for agile mammals and birds. The future for many big-spender corporate dinosaurs is equally bleak, but demand for services from businesses is not so bleak. Say goodbye to the big reptiles and say hello to those agile mammals and birds. Plenty of agile businesses will evolve over the coming decade and plenty of agile startups will be needed to provide them with products and services and those agile startups will need to be funded with plenty of agile venture capital. Of course, we'll want to have museums where people can go to gawk at the skeletal remains of those once-mighty big-deal reptiles.

-- Jack Krupansky

Posted by: Jack Krupansky at May 18, 2005 11:53 AM

Hey, I saw this guy at Thomas Friedman's talk at MIT about his book, "The World is Flat." First of all, I never thought that he was much of a deep thinker, leave alone, being a visionary. I mean, come on, if he has to depend upon a public forum of this sort to wean out his strategy going forward, I am sorry to say, but he is way behind the curve. Second, software is no longer the only forum to make VC's money - so his earlier example is moot. As was the case with IT being the great new thing in the 80s, so is now the case with newer technologies, countries, and even business models. Third, not all VCs are the same. Yes, they do go hunting together sometimes, but one person cannot represent the entire industry. It's like saying that just because IBM is down 30% therefore, the entire tech sector is in trouble. Ever heard of the lemmings theory and herd mentality?

Posted by: Gordon Gekko at May 19, 2005 04:59 PM

Definitely not sour grapes. Howard deserves a ton of credit for going out on a limb and raising these issues - whether you agree with him or not. Is it really surprising that most of the VC community doesn't? They have a LOT to lose if he's right (and I absolutely believe he is).

I know Howard very well - have worked for and with him for the better part of the past 12 years. He's not the least bit bitter - he's trying to help.

More commentary on my blog (reservoirpartners.typepad.com)

Posted by: Chris Selland at May 21, 2005 04:22 PM

I believe his comments hold true for all industries. Whether the investment is simply a facilitation of a competitive product/service or the driving force behind the adoption.

Posted by: Zoran at May 24, 2005 12:06 PM

Maybe the old battery needs recharging?

Posted by: Gina Betti at May 25, 2005 09:12 AM

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