Death of Venture Capital, Part 825

A lot of stories in the press in the last few days that echo my past BusinessWeek columns about how this downturn is very different for the venture capital industry. Problems in short: The ten year index that the industry has held up since the Nasdaq crash is about to plummet. 1999 and early 2000 returns will fall off in a little more than a year, and more than 70% of VCs don't expect an exit window until 2010 at the earliest. Problem #2: Beleaguered institutions that invest in venture capital are increasingly trying to sell off their stakes. Worse: Some are considering flaking on capital calls altogether.

To those of you who say platitudes like: "Downturns are GREAT times for innovation!" yes, that's true, but you are missing the point. This isn't just the cause of a downturn. This is a structural change in the industry that needs to occur and has been building for nearly a decade. There is far too much money, tech is maturing, and clean tech isn't mature enough. Paul Kedrosky and I discussed yesterday on TechTicker:

But, beyond all this, I think there's also a mindset problem when it comes to venture capital. Investors and many entrepreneurs are no longer focused on building companies and taking real risk. Paul and I did another clip yesterday about Facebook, where he argued it doesn't make sense for Facebook to stay a stand alone company anymore because the ad markets are going to be locked up for 24 months.

I love P-Ked, but what the hell does a 24 month contraction have to do with building a company? Especially a company that's still private, growing like mad, has loads of money in the bank and is essentially break even? We've got to break ourselves from this quick-fix, quarter-to-quarter mentality of Wall Street-- and increasingly Silicon Valley-- if any next great tech companies are going to be formed. The very reason great companies are typically started during downturns is they're started by people who aren't obsessed with timing a market. They're started by real entrepreneurs.

Paul and I also debated what Facebook's "real" value is now, and I put real in quotes because startup valuations are always based on promise, team, and a lot of other intangibles that will hopefully lead to a great business, but don't reflect business fundamentals right now. Yes, Facebook still has to nail its business model, and if it doesn't it's valuation could fall by 90%. But I argue the downturn is a great time to do that, especially considering the amount of money Facebook has raised for cheap and revenue it already gets from its lucrative Microsoft ad contracts. Is it worth $15 billion? No but it never was, as I explain in the clip below. It's definitely worth somewhere in the low billions and definitely shouldn't sell this year in a panicked market where every big company has a weakened stock currency.