Our Golden Goose is Dying

The golden goose of the US economy has been venture capital, where a surprising percent of jobs (11%) and revenue (21% of GDP) come from venture-backed companies (at least, according to the VC lobbying association). It has been dying for a decade. Sarbanes-Oxley, demonization of options, tax changes to advantage old-line companies, and much more has plucked it almost dry. The number of Billion Dollar exits in the last decade is a handfull, and most VCs can recite them (let’s see, Salesforce, Google, YouTube, Skype, First Solar, and a couple of Chinese ones with some US backing; MySpace was under $1B, and Facebook hasn’t exited yet). The first quarter was really bad (down 80%) but that may have been shell shock from the crash last year.

The second quarter looked promising, but now the third quarter stats are in: down 6% from Q2 and 38% from Q3 last year. Worse, m&a is also down: 10% down from Q2 and 49% down from Q3 last year.

It is well known in Silicon Valley how bad it is. After the slump in 1991 (due to the so-called war dividend at the end of the Cold War), a community-wide effort called Joint Venture:Silicon Valley helped recharge the community. (I played a small part, particularly around Smart Valley, wiring it for the Internet.) JV:SV is still around but the effort is not. This may be *merely* a Great Recession, but around here unemployment is higher than it was in 1991 and the malaise that accompanies a Depression is palpable.

CleanTech was expected to revitalize the place, and for a while it seemed to help. Michael Arrington of TechCrunch wrote a very perceptive piece a month ago called What Cleantech Should Learn from Nanotech (Before It Is Too Late). Nano was the Next Big Thing until it turned out not to be. Cleantech investors had great hopes in Obama, and give him a fair amount of support and money, but so far it is not turning out to be the Next Big Thing either. Simply put, energy generation deals seem stillborn due to their high cost (solar plants for example are still 3-4x more costly than coal or natural gas) whereas energy management deals seem to have legs. The whole biofuel bubble is long burst. One of the most noteworthy solar facilities in the Mojave Desert has run afoul of NIMBY – the green movement shooting itself in the foot by blocking it. Time and scale may cure the cost problem – if these plants get off the ground. In the meantime China is using excess capacity of semiconductors to dump PV cells into the US and Germany, making it even harder for alternatives to gain a foothold.

Right now the venture industry is watching to see if the IPO window has really re-opened. A few deals got out last Spring, including Open Table and Solarwinds (which is not a solar company). A bunch are lined up to go out about now or in Q1. A123 (NASDAQ:AONE) (a battery company – energy management!) and LogMeIn (NASDAQ:LOGM) — which competes with Solarwinds (NYSE:SWI) — both went out in Sept, plus a biotech company. Now, to get excited about 3 IPOs a quarter is pathetic, but that is a measure of how far we have fallen. Maybe another six can get out before Thanksgiving, if this market holds up.

The whole of Silicon Valley is waiting to see if a few more IPOs can alleviate the constipation of the VC firms.

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About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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