Big Is Bad for VCs
Tushar J. Mehta ([email protected])
Thu, 2 Sep 1999 12:18:26 -0700
Big Is Bad for VCs
by Melanie Warner, August 23, 1999
Fortune Magazine on-line
Copyright =C2=A91999 Time Inc.
------------------------------------------------
Venture capitalists devote all sorts of energy trying to figure out how t=
o
make their companies "scale up," as they say. Funny thing is, the one
business they've never quite figured out how to scale up is their own. Wh=
en
it comes to VC firms big is bad.
Nothing illustrates this more perfectly than last week's announcement tha=
t,
after decades of investing in promising new tech companies, two of the
Valley's oldest and most venerable VC firms, IVP and Brentwood, are calli=
ng
it quits. Some involved would prefer to call the announcement an "evoluti=
on"
rather than a breakup. However you choose to label it, the facts are this=
:
IVP and Brentwood, 19 and 27 years old, respectively, will raise no new
funds. Instead IVP partners Geoff Yang, Tim Haley, and Tom Dyal are leavi=
ng
to form a new Internet and communications firm with Brentwood's Jeff Brod=
y,
Brad Jones, and John Walecka. Brentwood's three other partners who do lif=
e
sciences investing will form their own firm. And they will be joined by
Crosspoint Venture Partners' two healthcare partners Donald Milder and
Barbara Lubash. Some IVP partners like Ruthanne Quindlan will go off and
find a new gig. Others will simply retire. It's so rare that the Valley'=
s
VC world produces such Wall Street Journal front-page-news-summary
happenings that the IVP/Brentwood evolution/breakup was the talk of Sand
Hill Road last week. Many VCs I talked to weren't all that surprised by t=
he
news. That's because they had noticed for some time now that Geoff Yang,
IVP's star partner, was bringing in all the good deals. And yet Yang had =
to
split those profits with 14 other people at IVP, many of whom were pullin=
g
down less than spectacular returns. Reid Dennis, IVP's founding partner,
displays admirable candor in acknowledging that this was going on. "Every
new deal that comes in wants Geoff on their board, but it's just not
possible. He's already on so many boards," says Dennis. "Now, with a team=
of
six strong people, they'll be able to shoulder the weight." Does that mea=
n
IVP's other partners weren't up to shouldering the weight? Well, yes. "We
didn't have the knowledge that Geoff had," acknowledges Dennis. Then ther=
e
was the inevitable politics. IVP had 15 partners and there were info tech
people sitting through irrelevant presentations from life sciences people
and vice versa. The size also meant that a fair amount of time was spent
selling your partners, some of whom might not necessarily be of the same
mindset as you, on new investments. Among Internet deals, one of the chro=
nic
issues was valuation. Some of IVP's older partners just couldn't get
comfortable with paying $30 million for a company with nothing to show fo=
r
it but a couple of PowerPoint slides. "The larger these firms get the mor=
e
unwieldy they become," says one Valley VC. "With size comes politics and
that dilutes the decision-making process." What's also happened, as
everyone well knows, is that the Internet has left a lot of casualties in
its wake. Among them are older, more senior venture capitalists. Keeping =
up
with the multitudes of new Internet markets requires a lot of energy and
aptitude. And some VCs, whose careers have been built on the stuff of oth=
er
Valley boom cycles, such as PCs, data storage, or biotech, just don't hav=
e
it in them anymore. Dennis, for one, doesn't feel like hustling out for 6=
:30
a.m. breakfasts to meet with some 32-year-old self-perceived master of th=
e
Internet universe because that's the only time he's got available. "This =
is
a young person's business. Plus, I don't think we (VCs) worked as hard in
the past as you have to now. The pace has accelerated so much in the past
two or three years," says Dennis.
Dennis says he's a little sad to see IVP go, but, all in all, has no regr=
ets
and thinks the new firm will mean great things for IVP's limited partners=
,
many of whom will invest in the new fund. Looking around Sand Hill Road a=
t
other longstanding VC firms, he thinks it's a solution other firms might
need to adopt. Predicts Dennis: "I don't think this is the last of these
combinations you'll see."
Tushar J. Mehta
email: [email protected]
voicemail: (206) 405-2335