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Apocalypse Maybe: The Venture Capital Meltdown
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
October 27th, 2000

By Paul Kedrosky

"My film is not a movie; it's not about Vietnam. It is Vietnam. We had access to too much money, too much equipment, and little by little, we went insane. " Francis Ford Coppola (at the 1975 Cannes press conference launching Apocalypse Now)

Due to my inavailability and momentary freedom from a laptop and Internet connection, this week's column is from a special guest, Paul Kedrosky. Paul is a well-known technology writer, having written for National Post, Industry Standard, Wall Street Jornal and others. He assures me that this will be his masterpiece. He may, in fact, retire after this article which will cause me to put the source up on eBay for immediate auction. - Brent

Brent is away, so let's talk about him. In case you hadn't heard, Brent Holliday (the normal occupant of this space) is a venture capitalist. Contrary to what you might have heard or read elsewhere, most venture capitalists are surprisingly nice people. On a train-ride index of financial type companionability, they rank somewhere between short-sellers and investment bankers.

Lest you think otherwise, that's not bad company. The former group has pride of place, of course. While the net-long portfolio managers (people who rarely sell stocks short) get all the press, they're not very interesting people. With rare exceptions, they're risk-averse and boring, glorified accountants who spend bull markets wishing they could be running their own funds, and bear markets hiding under their desks.

Short-sellers, on the other hand, are much more fun. Because their risk is, more or less, unlimited, they are generally a little nutty - and more than a little secretive. You would be too if your success depended on running against the pack, in trying to find a good reason to disagree with every smart person that you know. But mavericks are entertaining, and short-sellers are true mavericks.

But they have to be smart people. You don't get to gad about shorting stocks for very long unless you know your market. Not because there is someone certifying your ability to run money short; no, the market is merciless about that. It only takes a few short squeezes to bring you to your knees, heart pumping, skin clammy, and wondering whether you should have followed your parents' advice and gotten into petroleum engineering.

So slotting venture capitalists like Brent midway between i-bankers and short-sellers seems appropriate to me. They have the latter group's obssessiveness, and the former's love of the deal. And the best among them are honorable people. They think that starting quality long-lasting companies is an honorable thing. Do that right, they think, and they will be rewarded. Good on 'em, I say.

Their ranks, however, were infiltrated in recent years by carpetbaggers. All sorts of people have shown up in the venture capital game who really had no interest in creating companies. Matter of fact, most of these newcomers (and Vancouver has its share) probably wouldn't even bother creating companies at all if it weren't tricky to sell off their interest in some high-concept notion without having a company as the vehicle.

But the jig is up. Business Week, Fortune, and Forbes have all taken it on themselves to extend the current round of demythologizing from dot-coms to venture capitalists. Without discriminating between carpetbaggers and company creators, they have let fly with all barrels. The anger is palpable, the sort of anti-VC vitriol usually sported by spurned startups.

Fortune magazine ahistorically points out in its current issue that somehow venture capitalists got deified, turned into all-knowing, all-seeing market Svengalis. (Neatly glossing, of course, Fortune's own role.) Now, however, Fortune says that reverence is dissipating. Thanks guys.

Why? Demonstrated fallibility helps. The dot-com bust, the current frail boomlets in wireless and optical networking - all of these are providing critics with evidence that, contrary to what they self-servingly wrote a few years ago, venture capitalists are just as clueless as the rest of us. They do their diligence, place their bets, do their frantic hand-holding, and then they march on - okay, sometimes they skip the odd step.

Let me say it straight out: Funding a company is meaningless. You can rain capital into a company trying to change the shape and direction of a market, and it doesn't matter. What you're doing must make sense, or it is just pushing rocks uphill. Eventually you'll tire of the struggle, and, unless you're quick getting out of the way, the rocks will come right back and crush you - without so much as a "thanks for the push".

Do billion-dollar funds, a la Benchmark Capital and its ilk change the rules? Only temporarily, and only in narrow geographies. Infinite amounts of capital distort market forces the way that point masses distort gravitational fields: it is a highly-localized phenomenon - and a transient one in the case of ever-perishable capital.

Nevertheless, the media eagerly built venture capitalists up, and now they're equally eagerly tearing them down. Technology-glorifying stories needed a deux ex machina, a ghost in the machine that could provide dramatic impetus, and venture capitalists played that role. But it's time we all grew up, time we shook those superstitious views. Creating companies that last is about hard work, motivated people, and great ideas. Capital runs a distant fourth.

It's time to stop fantasizing and get back to work. Welcome back from holidays, Brent.

What Do You Think? Talk Back To Brent Holliday


Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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