Interview with six prominent venture capitalists on the industry's future.
THE ROUNDTABLE
L. John Doer
General partner of Kleiner Perkins Caufield & Byers, San Francisco, a partnership noted for lead participation in major high-tech deals. An entrepreneur himself, Doerr founded a successful software company before switching to finance.
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Edward J. Mathias
A managing director at T. Rowe Price Associates, Baltimore, a $30-billion multifaceted portfolio manager with more than $200 million invested in private companies through partnerships that focus on late-stage and mezzanine rounds.
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Thomas B. Judge
Director of alternative investments at AT&T, Berkeley Heights, N.J. Judge administers the portion of the company's $36-billion pension fund that seeds small businesses.
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Robert Hoff
General partner at Crosspoint Venture Partners, Irvine, Calif., primarily a seed and start-up investor with a $120-million capital base. Previously, Hoff was president of a successful small-business investment company.
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Gregory M. Avis
A general partner at Summit Partners, Boston and Newport Beach, Calif., a diversified venture capital investor with a base of some $400 million. Before coming to venture capital, he was in corporate finance on Wall Street.
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Peter C. Wendell
Founder and general partner of Sierra Ventures, Menlo Park, Calif., a firm with about $100 million invested in early-stage companies, many of which are in technology-related businesses. Wendell teaches a course on entrepreneurship and venture capital at Stanford.
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Late fall, 1990. With venture capital's best-ever money-raising decade drawing to a close, Inc. invited six prominent practitioners to San Francisco to contemplate the industry's future.
The hotel suite may have been elegant, but the table setting wasn't: on it were rising unemployment, growing debt, higher taxes, lower stock prices, and a host of other economic worries. To make matters worse, the venture capital industry itself, long accustomed to easy annual returns of more than 20%, had suffered some stinging reversals.
Few of the country's small businesses are launched through professional venture capital anymore, and multitudes succeed without it. So who needs all this confounded deal making, anyhow? The system does. Shrinking venture dollars and poorly performing venture-backed businesses -- should those be the conditions we have in store for us -- will sap investment enthusiasm across the board. By the same token, expansion of venture capital at even a modest fraction of its 1980s rate would embolden entrepreneurs and backers of every stripe.
In a session moderated by senior writer Robert A. Mamis, these financiers thrashed across fresh and revealing ground as they considered a variety of causes and effects that might indicate which road we are going down.
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INC.: As we talk, the overall economy is falling into disrepair. What are the current prospects for a small-business person hoping to start a new company?
DOERR: It's the kind of economic climate that allows you to get going without competitors' being ready to rip your throat out by starting a business just like yours. There's never been a better time than now to start a new company.
MATHIAS: I don't know that there's never been a better time. Let's say this seems a good time. But it's not the same as when those big returns that people talk about today were achieved. Those were made from seeds planted during the late '70s, when there were major new technologies and much less competition, the people starting new businesses were highly experienced, and private companies were less expensive than comparable public companies. Now you have a quite different situation: few major new technologies, intense competition for good deals, and attractive private companies that are more expensive than public ones.
INC.: Did venture capital run out of good ideas to fund?
WENDELL: That there's nothing to fund anymore is a common misperception. As the amount of venture capital available to entrepreneurs has grown, the range of opportunities that venture capital has focused on has gotten much, much wider. Almost half our current fund is in technology-related service businesses, and over the past six years we've done six environmentally related companies.
INC.: There's been a huge increase in institutional money going into public companies over the past decade. Can we assume that the pool of risk capital for private companies is dwindling?
HOFF: Not yet -- but it probably will be soon. The total venture capital pool has grown every year since '78, from $4 billion to $34 billion. I expect that growth will come to an end in 1991, and that available capital will shrink for several years after. The decline should be gradual and will likely stabilize in the mid-$20-billion range -- still quite a robust number.
AVIS: Frankly, I'm puzzled by all the gloom and doom. Venture capital is reaching maturity like any industry. What happens when an industry reaches maturity? Growth rates slow, competition increases, consolidation ensues. It's a natural evolution of any industry. There's no reason for us as venture capitalists to think we're immune from natural market forces. Overall, the long-term outlook for the survivors is quite positive.
INC.: But aren't venture funds facing returns of zero -- and less?
MATHIAS: That's not true for all venture capital funds. But there is a "lost generation" of funds, largely those started from 1983 to 1987, whose returns probably will be negative in the end. Those results already have begun to affect capital commitments adversely. It's possible there will be a significant shortage of capital. Let's hypothesize that we're going to have a relatively slow IPO market and that exits in any form won't be easy. There were 1,500 or so early-stage financings in 1989. All those companies will need three, four, or possibly five times the amount of their early-stage financings. This represents a huge potential need for capital -- around $10 billion to $15 billion. As of now, it's hard to identify where it will come from.
