The Sun is Still Shining in Silicon Valley: Venture Capital Counter-attack

Posted by: Spencer Ante on September 23, 2008

Last Thursday, I was lucky enough to host the National Venture Capital Association’s 35th anniversary gala at Microsoft’s Mountain view campus in Silicon Valley. I gave a reading from my book Creative Capital and introduced several entrepreneurs, including Elon Musk from Tesla Motors, who showed up in one of his snazzy new electric sports cars.

“It’s faster than a Ferrari and gets better mileage than a Prius,” boasted Musk.

I also saw a bunch of old VC faces (Burton McMurtry and Reid Dennis) and some new ones (Ira Ehrenpreis, Rob Soni, Trevor Loy).

I was particularly interested in gauging Silicon Valley’s reaction to the financial crisis. As far as I can tell, most denizens of the Valley think that the tech industry will emerge relatively unscathed and do just fine. Tech companies don’t rely on debt all that much, VCs are stocked to the gills with money and institutional investors remain committed for the long term. (In another leading indicator of the Valley’s health, traffic on Route 101 remains robust, so that’s a good sign.)

“VC will survive,” says Diana H. Frazier, managing partner of FLAG Capital Management, LLC, a big fund-of-funds investor that places money with VC firms on behalf of other investors. “It is a long term business that doesn’t react to short term crises. Cisco was first funded in October 87 AFTER the crash.”

But VCs do remain very concerned about the state of our capital markets. And they should: The lack of IPOs is depressing returns for VC funds. Just six VC-backed companies have gone public this year, collectively raising less than $500 million, compared to last year when 86 VC-backed IPOs raised $10.3 billion.

This summer, before the financial market meltdown, the NVCA held a press tour announcing a capital markets crisis. Now, with Wall Street imploding, incoming NVCA chairman Dixon Doll announced a new effort to help repair the U.S. capital markets.

At the event, Doll told the crowd that the NVCA plans to organize three regional “blue chip task forces” to come up with suggestions for how to fix the problem. In November, the NVCA will assemble groups of 12 to 15 financial experts in Boston, New York and San Francisco. The plan is to discuss the root of the IPO crisis for venture-backed companies and make recommendations to the new administration and Congress as to how to revive the IPO market.

“We plan to generate lots of recommendations, gather them together, then go back to the media and new Administration next year and make a big deal,” Doll said.

NVCA lobbyists are also keeping a close eye on tax legislation. Last year, an effort to raise capital gains taxes on VCs was killed. But NVCA staffers told me some politicians are trying to raise taxes on VCs to help pay for the alternative minimum tax patch.

When VCs do make the rounds in Washington, they will be showing a video that the group produced and debuted at the event. It’s an 11-minute tongue-in-cheek depiction of the struggles of an entrepreneur, which reminded me of the Wedding Crashers movie.

In the hilarious flick, the two protagonists crash the wedding of the U.S. Treasury Secretary’s daughter by pretending to be venture capitalists. It’s the perfect cover because it sounds impressive but hardly anyone knows enough about VCs to know that they are totally full of it. I doubt this short film will change that impression all that much but if you had to explain VCs to your grandmother this would be a good place to start.

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Reader Comments

Noah.tv

September 24, 2008 12:38 PM

Given the current financial meltdown, it's ironic that the safest place to invest savings is in new businesses that can address existing and emerging world needs, problems, and to create new ones.

Luckily, the private equity industry can be very effective in generating innovation.

Although innumerable people will suffer from the coming downturn, theoretically, it seems possible that the downturn could lead to explosive growth through innovation driven by quasi-desperation.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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