What is it about journalists and venture capitalists? When we journalists
report on VCs, we forget our watchdog responsibility and act instead like=
so
many agreeable puppies anxious to please.
My best guess is that this approach to covering VCs-who happen to provide
much of the crucial funding for Internet startups-stems from an odd mix o=
f
empathy and envy that many journalists feel. After all, good VCs have
qualities shared by good journalists: They're smart, they're resourceful,
they have good contacts, and they're knowledgeable. Then why (and here co=
mes
the envy) are they so doggone rich? These ruminations are prompted by a
recent article that appeared on TheStreet.com, amid the current softness =
in
Internet stocks, under the headline "Venture Capitalists Viewing Net IPO
Shakeout as a Return to Quality." The implication of that headline is tha=
t
the titans of venture capital are taking the long view, assessing the
current rout in Internet stocks with a Solomonic wisdom and detachment.
The truth, which almost never appears in journalistic accounts, is that a
time like this scares VCs out of their wits. Especially in an industry wh=
ere
real profits are elusive, and where the expectation of future profits is
fantastically high. And especially among VCs who rely for their success n=
ot
on their own market vision, management expertise, or recruitment skills, =
but
on the existence of a Greater Fool.
Enter your average Joe and Jane day trader, ready and willing to pay just
about any price for a company with the word "dot" in its name. And add to
that group the professional money managers who, while not understanding t=
he
Internet a whit, have nevertheless added millions of dollars worth of
Internet stocks to their portfolios in the past nine months. Such investo=
rs,
as it turns out, were the Greatest Fools of all, and now that there are n=
o
more of them left, the VCs in Silicon Valley are looking at their holding=
s
the way Randolph and Mortimer Duke came to see their orange-juice positio=
ns
in the 1983 movie "Trading Places"-as things that have a downside after a=
ll.
The fact is that the Internet stock run-up between last September and thi=
s
April has littered the public market with a mind-boggling amount of junk.
Nor is this exercise in legal dumping over. As I write this, several doze=
n
new Internet companies are in registration, waiting to see if they can li=
ne
up a sufficient number of investors to complete their IPOs. Some of them =
are
relying on fancy new Internet services and schemes, such as online Dutch
auctions, to help them find investors. Many of these IPO-bound companies
haven't a prayer of success, but that's not the only problem. Another
problem is that at the valuations practically all of them are seeking,
they're being burdened with expectations that will be impossible to fulfi=
ll.
And that's true even now, with Internet stocks off their highs.
Yes, a time like the present forces a return to quality. No, that's not a
good thing for those who have invested aggressively in a hot market durin=
g a
time of greed. Things are not quite as sanguine in VC-land as the news
reports would have you believe. "Look Out Below!" would be a better headl=
ine
for how VCs are feeling nowadays. To what extent are venture capitalists
going to get hurt by the current decline in Internet stock prices? Have V=
Cs
already made such huge gains that any future losses will be insignificant=
in
comparison? Please send your thoughts on this topic to [email protected].
Tushar J. Mehta
email: [email protected]
voicemail: (206) 405-2335