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October 16, 2006

Is Sevin Rosin poisoning the venture well?

Why did Sevin Rosin have to be so public about their decision not to raise a new fund? After all, the reasons cited for the decision - “The traditional venture model seems to be broken,”, "too much money had flooded the venture business and too many companies were being given financing in every conceivable sector", etc. - have been known for quite some time now. (Battery Ventures co-founder Howard Anderson had written a much publicized article saying pretty much the same things in August).

Will Price of Hummer Winblad Venture Partners is clearly not pleased with the way SR Funds handled the issue. In his blog, Will likens the firm's actions to that of a retreating army that poisons wells to spite the victors.

Throughout history, retreating armies have poisoned wells, burned crops, and otherwise left the victors with barren lands. Which brings me to Sevin Rosen.

Not simply content to quietly shut down after nine funds and several decades of very succesful and significant investments, the firm announced the industry broken and incapable of creating value for its limited partners. In articles in the NYTimes and interviews on CNBC, Steve Dow is making his case for an industry in decline doomed to poor investment returns.

I must say that I find it remarkable that a set of investors whose professional existence is predicated on funding disruption and innovation are publicly advocating that an end-state in the venture capital industry has been reached; that no viable models exist, no innovations exist, no disruptions exist that will allow people to rewrite the venture rule book and add value.

Will goes on to describe how other funds, which are willing to take up the current climate as a challenge, can come up with new models for making the economics work.
My read is that firms will need to go earlier to avoid the ugly exit realities, or they will go abroad to leverage growth markets. Mid to late stage US investing will be a real challenge. The US will see smaller funds that are economically viable in the current market.

Life is disruptive and all business people - operators and investors - need to constantly question their strategies and demand an intellectually credible answer to how to best compete given the exogenous variables at work in any given industry.

VC is no different and it is too large and specialized an industry to extrapolate industry malaise from the hardships of a few funds. While I have great respect for Sevin Rosen's track record, I am not quite sure why going on CNBC to discuss the "broken" industry is a good idea.

Also read, Will's earlier response to Howard Anderson's article.

Arun Natarajan is the Founder of Venture Intelligence, which tracks private equity and venture capital in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.