Nonlinear Thinking

Venture Funding Dries Up in Q1

The venture capital industry took another big hit in the first quarter of the year, according to new data from Dow Jones VentureSource. VCs pumped 50% less money into startups than they did one year ago. At $3.9 billion, it was the lowest total the industry has seen since 1998. That means it was worse than anything seen in the years after the seminal dot-com bust. Information technology fell to its lowest levels since 1997, with just $1.68 billion in deals, and clean tech fell by 73% to just $117 million.

Trends: The Economy and the Internet

This presentation from Morgan Stanley's Mary Meeker and friends is incredibly rich with data, information and graphics and really presents a much broader look at our current economic landscape than just the impacts on the Internet.  Too much here to really comment on but many of the charts are a story unto themselves.

Global Economic Slowdown - Nothing Ventured, Nothing Gained

In what cannot be considered a surprise to anyone living in the real world, venture capital investment is drying up.  Investments in the third quarter declined to the lowest level in almost two years.  VCs invested $7.1 billion in startups and emerging companies across a range of industries in the third quarter of 2008, a 7% decline from the second quarter when $7.7 billion was invested, according to a just-released report from PricewaterhouseCoopers and the National Venture Capital Association that’s based on data from Thomson Reuters.

The numbers show that funding was tightening even before September’s financial-market craziness, leaving many experts believing things will only get worse. “We do expect a dip in investing over the next several quarters,” says Tracy Lefteroff, global managing partner of PWC’s VC practice.

The key question is, What happens next? Conventional wisdom settling over entrepreneur land is that VC funding will become even more scarce and that a growing percentage of available funding will go to later-stage companies, which are finding it impossible to exit into the IPO market.

Earlier this month, one of Silicon Valley's most prominent venture-capital firms, Sequoia Capital, summoned entrepreneurs to its headquarters for a dose of gloom and doom. A PowerPoint presentation used in the event, titled "R.I.P. Good Times," warned that the current crisis is global and recovery will take a long time. Companies must cut jobs, save cash and expect smaller capital raises.

Sequoia Venture Capital Warning to CEOs -

One View on IT Spending

MGI Research is an investment firm focused on the broad information technology industry.  They have been conducting an informal outlook poll of business executives from several leading financial services companies over the past few days. 

The results of the poll provide some insight into what the business people at those companies are thinking about the time horizon for recovery from the current financial crisis, and what it means to IT spending and expectations. 

(A word of warning - it’s not very pretty!)

A majority of those with whom we spoke expressed a view that 2008 and 2009 will largely be write-offs for their core businesses, and at best a chance to pick up some good assets amid the current carnage. The prevalent point of view was that a sustainable recovery in the financial services sector should not be expected till 2010. Some also voiced concerns that consolidations and government intervention in the financial services sector while ultimately helpful, will not significantly alter the current downward trajectory for the economy as a whole. None of those we interviewed could offer any definitive view on what the direct immediate impact of the financial sector crisis is on tech spending, but did admit a great deal of uncertainty, mentioning that all spending, especially discretionary, is being put under review. Our analysis of this rather limited set of data points forces us to think that one should not expect a broad turnaround for business momentum for IT vendors till 2010 or even 2011, especially as it pertains to IT vendors focused uniquely on the financial services industry. It should be noted that the financial services sector represents over 20% of all enterprise IT spend.

In our research published in the July 2008 MGI benchmark of 75 applications software vendors, we highlighted a trend of stronger companies improving their MGI Index efficiency scores while the average application software companies saw their efficiency scores decline. We expect this trend to continue broadly amongst tech companies, as the companies with stronger management teams and business models "button down the hatches" early to survive the current storm, while the companies with less efficient MGI Index scores tend to suffer from "deer in the headlights" over-optimism in their business planning.

(Silicon) Valley of the Damned

The economy has been incredibly challenging for companies in general, but it has been even rougher on venture capitalists hoping to realize returns on some of their most mature investments.  From the New York Times:

In the second quarter of this year not a single company backed by venture capitalists has gone public. It is the first time that has happened since 1978, according to industry group The National Venture Capital Association.

The other bad news was the industry’s disclosure early Monday morning that acquisitions of venture-backed companies are down sharply, too. In the second quarter, 50 mergers or acquisitions of venture-backed companies were completed. That’s down from 70 in the first quarter.

General weaknesses in the financial markets have kept many companies from taking the plunge. But venture capitalists say they have started to back technologies like alternative energy that take relatively long to gestate before they are ready for the public market.

Wall Street is being very selective in taking companies public, and blessing only those with particularly high revenue and growth projections. And venture capitalists are wary because they worry that their returns will be limited in a depressed market.

Some venture capitalists are arguing that the pipeline for public offerings has dried up in part because of the considerable shift in the industry’s interest in the last three years into “green” technologies, which was taking time to bear fruit.

But Paul Kedrosky, an investor and the author of Infectious Greed, a venture capital-centric blog, said that there were deeper, more systemic problems for venture capitalists in addition to the cyclical challenges. He said part of the problem was that the industry was backing companies that lack widespread investor appeal, like YouTube clones and dating and social networking sites.

“There is nothing that the industry is producing that investors want,” Mr. Kedrosky said. “The stuff they’re investing in is idiosyncratic — it’s fun and appealing to them but Wall Street doesn’t care.”

Mr. Kedrosky said the problems were particularly acute for venture capitalists — and that leaves them with some answering to do to their own investors.

“Here’s an industry struggling in a big way to hang onto its investors, let alone find new ones,” Mr. Kedrosky said. “They’ve been hanging on by their fingernails.”

The lack of a good way to cash out just makes things worse, he said. “There is no venture industry if there is no I.P.O. market.”

It is interesting that Web 2.0/social media continue to be viewed as sexy but lacking in a definable revenue model.  For all their pervasiveness, and Facebook's $15 billion valuation, there hasn't been a lot of monetization of the platforms beyond Youtube and MySpace.

Web Trend Map 2008

I don't recall ever seeing this but it is both really interesting and artistic, in a Web pop art kind of way.  Information Architects, an analytic design consultancy that builds and manages interactive brands based in Tokyo, puts this together every year.

iA have taken almost 300 of the most influential and successful websites and pinned them down to the greater Tokyo-area train map.

This would make a tremendous gift for the special Web-centric someone in your life.  And iA makes it possible by offering several different versions for sale on their Website here. .

Here's a closer view of some of the detail.

Revisiting “The Economy of Ideas”

In the March 1994 issue of Wired magazine, Grateful Dead lyricist, Wyoming rancher and co-founder of the Electronic Frontier Foundation, John Perry Barlow delivered a revolutionary discourse on the challenge to intellectual property in the emerging digital age. His original article, now taught in many law schools, is worth revisiting as a touchstone to see how much progress we have made in the past fourteen years.

The system of copyright and patent law that governs intellectual property ownership is the product of an era that produced tangible outputs. An idea’s true value was realized only through its physical manifestation. Books, records, CDs, DVDs, and floppy disks represented not the idea, but the conveyance of the idea. That is how intellectual property has traditionally been controlled and sold.

The World Wide Web, and all its appurtenances, made the physical conveyance of ideas and information less tangible. Property laws have failed to evolve in a meaningful way and no longer fit the times. What we have witnessed, and are continuing to experience, is a profound change in the concept of property, value, ownership and the concept of wealth. The magnitude of this discontinuity has become a major threat to the traditional proprietors of intellectual goods -- music companies, publishers, software developers. The response to the threat has been to try to fit the very square peg of existing intellectual property law into the round hole of the digital environment.

The larger threat to society is the potential damage to to the economy of ideas. That threat has been moderated over the past several years as the concept and structure of social networking has been fleshed out. Most ideas reach their full potential through the ad hoc, collaborative imagination of many individuals and constituencies. Shared ideas become more profound, more rounded and more valuable to more people and institutions. Whatever the form the debate takes and however we reframe intellectual property rights for the digital age, it is imperative to maintain a culture that values ideas over things. Greed must somehow be sublimated to the common good, and the potential for the free sharing of ideas, to enrich everyone.