A Consensus of Three: Venture Capital Still Looking to Grab Rebound

Xconomy San Diego — 

Have we turned the corner on the recession? That was the big question for the out-of-town venture capital partners—including two from the San Francisco Bay Area—who came to San Diego last week to offer their perspective on the post-collapse generation of venture capital and technology innovation.

“One thing that’s clear is that the other side of that corner is not going to be the same,” said Emily Mendell, vice president of strategic affairs with the National Venture Capital Association in Washington, DC. Mendell also came to town to moderate the breakfast discussion organized by the San Diego Venture Group, also featured Bryan Roberts, a Venrock partner in San Francisco; David Dreesen, a Battery Ventures partner in Menlo Park, CA; and Mike Dodd, a venture partner at Austin Ventures in Austin, TX.

So what did these VCs say about a rebound? Dreesen and Dodd said “yes” when they thought the question was whether the overall economy had turned the corner. But all three VCs said “no” when Mendell clarified her question to ask whether the venture capital industry itself is rebounding.

“The Valley [Silicon Valley] is red-hot for early stage deals,” said Dodd, who oversees mostly Web-enabled consumer and online media deals at Austin Ventures. VC investing also has developed some interesting themes in certain sectors, such as Internet startups, which have become much cheaper to develop and much easier to bootstrap. But the fundamental problems remain: There is still little exit activity among venture-funded startups, “and just too much money running around,” Dodd said.

Cleantech also has been a robust sector for VC investing, accounting for over 30 percent—or about $1.7 billion—of the venture capital that was invested nationwide during the first quarter, according to Dreesen, who oversees much of Battery Ventures’ cleantech deals. But Dreesen added, “There really hasn’t been a shakeout in cleantech,” where he estimates $30 billion has been invested since 2005.

So does he see a bubble in cleantech?

“Well, when you’ve got $30 billion going in, you’d like to see at least $30 billion coming out,” Dreesen said. He estimated an investment like that would have to generate something like $120 billion in total return on investments to justify the risks, which seems unlikely. “I think cleantech as a sector is not going to do well,” Dreesen said, “although we think there are opportunities that are going to do well.”

Roberts, who oversees investments in life sciences and health IT at Venrock, said the venture sector has been a game of trying to pick the right deal for the past 15 years. But now it faces even greater challenges in terms of sorting the wheat from the chaff. In health IT, for example, Roberts said the healthcare industry is projected to spend only about one-fourth as much as the financial services industry on new IT infrastructure. With those odds, VC partners might be wiser to place their bets elsewhere.

Roberts later said venture capital “doesn’t look great” as an investment category these days, but a lot of other investment categories don’t look good either.

The VCs also offered their perspectives on a variety of other topics:

—When asked about emerging opportunities they see in their respective areas of expertise, Dodd said, “We’re going through a secular trend that we really haven’t seen since the PC era, and that is in mobile computing…and we’re only in the second inning. It’s going to be big, and it’s going to be interesting, and it’s going to potentially be as big as the PC.”

—The “smart grid” (in which utilities use advanced IT to collect data on consumer energy usage and to manage the power grid) does not represent an opportunity to deploy IT equipment and specialized appliances on a scale comparable to the Internet boom, Dreesen said.

—Asked how an entrepreneur could arrange a meeting, Roberts said, “Get someone who knows me pretty well to introduce you. It’s not like I or Venrock just showed up yesterday, and if you can’t find that, and you have to go through the website, then the question is ‘why?’ I mean, entrepreneurs are supposed to be pretty resourceful, right? I do look at the stuff [i.e. business plans] that comes through the website—usually on the flights from Boston to the West Coast—and the quality is not the same.” Dodd agreed, saying, “I don’t think I’ve seen one deal in two years that came through the website.”

—Asked for the one factor that can make a deal happen, Dreesen said, “For me, it’s hard to pick one thing because there are a lot of different elements that need to come together. In the cleantech arena, though, I would say one thing is economics. If you’re a biofuel company and you can produce a fuel that’s way cheaper than gasoline, [that can make a deal happen.]”

Dodd added that an entrepreneur “definitely needs to be able to see around the corner a little bit… and to show an ability to continually make the right decision.” In digital media startups, Dodd added that in addition to hiring an entrepreneur who understands consumers, “We look for somebody who is a really good artist.” In this age of iPhone apps, Dodd said, having an artistic ability “to intuit an interface to a consumer is a critical talent.” He said his firm spends a lot of time looking for recruits at art schools to put into companies. “Before, being an art student, you were kind of relegated to making $8 to $10 bucks an hour, even if you were really talented,” Dodd said. “Now, you’re actually highly sought after—if you can pull all those pieces together.”

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