A Silicon Bubble Shows Signs of Reinflating

In a memorable scene in the “The Social Network,” the actor Justin Timberlake, who portrays the Silicon Valley investor Sean Parker in the movie, leans over the table and tells the founders of Facebook in a conspiratorial tone: “A million dollars isn’t cool. You know what’s cool? A billiondollars.”

These days in Silicon Valley, a billion dollars seems downright quaint. The enthusiasm for social networking and mobile apps has venture capitalists clamoring to give money to young companies.

The exuberance has given rise to an elite club of start-ups — all younger than seven years and all worth billions. Successive investments in Twitter have reportedly increased its value 33 percent, to $4 billion, while Zynga, creator of the popular Facebook game FarmVille, is worth more than $5 billion.

Google was willing to pay $6 billon for Groupon, an online coupon company that was valued at $1.35 billion only eight months ago. And Groupon was willing to reject the bid on Friday evening, presumably because it could sell for even more money later.

Less than a decade after the dot-com bust taught Wall Street and Silicon Valley investors that what goes up does not keep going up forever, a growing number of entrepreneurs and a few venture capitalists are beginning to wonder if investments in technology start-ups are headed toward another big bust.

The chief evidence, according to industry experts and analysts, is the way venture capitalists and established companies are clamoring to give money to young companies, including those with only a shred of an idea. They are piling into me-too start-ups that imitate popular Web companies that already received financing.

Companies that involve social shopping, mobile photo sharing and new social networking are finding it easy to attract investors because no one wants to miss the next big thing.

Yammer, a system for sending Twitter-like messages inside businesses, recently raised $25 million, while investors reportedly signed a check for close to $30 million for a niche blogging site called Tumblr. GroupMe, a new group messaging app for cellphones, raised $9 million. Path, an iPhone app for sharing only photos on a social network limited to just 50 people, received $2.5 million. Its competitor, Picplz, scored $5 million. And those are just within the last few weeks.

It has some venture capitalists scratching their heads.

“I’m not saying Quora, Foursquare, Square aren’t eventually worth a lot of money, but the price to pay to get into those games is kind of amazing — $50 to $80 million?” said Dave McClure, founding partner of 500 Startups, a technology incubator in Silicon Valley. “These companies are in big markets with proven founders, so maybe not absolutely crazy but certainly eyebrow-raising.”

Fred Wilson, a prominent venture capitalist, said he had watched the trend accelerate over the last six to nine months. “I am seeing many more unnatural acts from investors happening,” he said in a recent blog post. He attributes it to competition among investors eager to participate in popular young start-ups. And he notes, “I have never seen phases like this end nicely.”

No one really knows if there is a bubble until after one pops. Nevertheless, there are many signs of froth. For example, enthusiasm for closely held Facebook shares has run so high that private investors are trading derivatives of it.

“I always get a little nervous about bubbles when five different angel investors ask me to join their brand new angel funds” in one week, said Alex Gould, leadership scholar of the Stanford Institute for Economic Policy Research. And although the rapid-fire pace of investment in popular Web companies feels reminiscent of the investing craze that led to the dot-com bust a decade ago, there are a few significant differences.

For starters, this is not a stock market bubble. None of the companies are publicly traded.

Mr. Gould said that while “bubble behavior doesn’t change,” the culture of high-flying start-ups like Flooz.com, Pets.com and theGlobe.com making initial public offerings is largely nonexistent. Those did not fare well, though companies like Amazon have continued to prosper.

Instead, entrepreneurs are increasingly looking to large technology companies like Microsoft, Apple or Google with mountains of cash, not the stock market.

Those three companies have about $90 billion in cash on their books. McKinsey & Company calculates that the largest software and hardware companies have enough excess cash on hand to buy nearly all of the tech industry’s midsize companies.

Although the volume of deals is expected to swell, financiers are much more conservative in the amounts they are investing in each company.

“Back in the ’90s, companies got funded for five times the amount that Tumblr raised and didn’t have anything close to a business model,” said Roger Ehrenberg, founder and managing partner of IA Ventures. “People were getting $50 to $200 million a pop and it brought down an entire industry.”

The frenzy is as much the result of simple laws of supply and demand as the herd mentality. Thanks to the constantly falling cost of computing power, a start-up needs less money to get off the ground.

Meanwhile, more wealthy people are viewing investing in technology as a hobby, which has increased the competition.

“Investing in technology has become fashionable,” Mr. Ehrenberg said. “It used to be that angel investing was the province of wealthy men. Now its become the province of everyone.”

Some venture capitalists — hungry for growth and troubled by weak returns — have moved toward smaller investments, hoping to catch the next Facebook in its infancy.

“I think at the high end, it’s not that frothy, but there’s a lot of exuberance in the early-stage stuff,” said Chris Sacca, an angel investor who has decided to temporarily hold off on new investments until valuations drift lower. “A lot of the valuations there don’t make a lot of sense.”

Most Silicon Valley investors still see no signs of gloom and doom. Ron Conway, a San Francisco financier who has invested in more than 500 companies, including Facebook, Zappos, Google and Twitter, says he does not think there is any bubble.

“All the start-ups today have business models and business cases that make them viable,” he said in an e-mail. “In 1999 when the bubble happened many companies did not have business models and advertising on the Web was very immature.”

Jeff Clavier, managing partner at SoftTech VC and a well-known Silicon Valley angel investor who has financed companies like Mint and Ustream, said that over the next 12 to 18 months the real challenge for start-ups flush with venture cash would be proving they were worth the investment or risk having to fold their companies.

“There may not be a big implosion, but down the road there will be a bunch of blood and tears,” he said.

“The music is going to stop and people will realize there aren’t enough chairs for companies to get the next round of financing.”

http://dealbook.nytimes.com/2010/12/03/a-silicon-bubble-shows-signs-of-reinflating/?partner=rssnyt&emc=rss

Twitter Financing Raises Its Value to $3.7 Billion

Twitter has raised a big new round of venture capital, $200 million, valuing the company at $3.7 billion.

The financing brings the total raised by the three-year-old company to $360 million. It was last valued at $1 billion when it raised money in September 2009.

A new investor, Kleiner Perkins Caufield & Byers, contributed $150 million, and existing investors, which include Union Square Ventures, Benchmark Capital and Spark Capital, invested $50 million.

The fresh capital comes as Twitter tries to prove that in addition to being an Internet phenomenon with 175 million registered users, it can also be a serious business. It has recently introduced several types of advertisements, courted big businesses and promoted Dick Costolo, its business-minded former chief operating officer, to chief executive.

In an unusual move, a Kleiner Perkins partner did not join Twitter’s board, but the company did add two new board members: Mike McCue, a co-founder of TellMe and current chief executive of Flipboard, which transforms Twitter feeds into a more attractive format; and David Rosenblatt, former chief executive of DoubleClick, the advertising company now owned by Google.

The Twitter investment is a big win for Kleiner Perkins, a firm that made its name in the 1990s investing in Web companies like Google and Amazon.com, but was late to get into the social networking trend. Recently, it has been trying to join in, with investments in companies like the game maker Zynga and a new fund for social networking start-ups.

“As part of the Twitter team, we look forward to helping build the next great Internet treasure,” Kleiner Perkins said in a statement.

News of the investment was first reported by the blog All Things D. Matt Graves, a Twitter spokesman, confirmed the details, and Mr. Costolo wrote about the funding in a company blog post.

http://bits.blogs.nytimes.com/2010/12/15/twitter-financing-raises-its-value-to-3-7-billion/?partner=rssnyt&emc=rss

Ex-Google exec’s venture firm to raise $100 million

(Reuters) – Merus Capital, the venture capital firm co-founded by Google Inc’s former head of mergers and acquisitions, is preparing to raise a new $100 million fund, according to a limited partner of the fund.

The firm, based in Palo Alto, California, is still investing in start-up companies out of its initial fund of roughly $40 million, but plans to raise a second fund in early to mid-2011, said the limited partner, who wished to remain anonymous.

The plans to start a second fund come as a new generation of fast-growing Internet start-up companies, such as online coupon provider Groupon and social gaming firm Zynga, moves into the investor spotlight. Earlier this month, microblogging sensation Twitter raised $200 million in new funding from several venture firms.

Merus, which was started in November 2007, has focused its investments on early-stage software companies that develop tools to help large, Internet-connected businesses operate more efficiently. That formula netted at least eight investments in the first fund, including Chai Labs, a startup that was founded by ex-Google executive Gokul Rajaram and, according to media reports, was acquired by Facebook earlier this year.

Merus was founded by Salman Ullah, Google’s former Vice President of Corporate Development, and Sean Dempsey, who worked with Ullah in the group responsible for Google’s M&A. Before that, the pair worked in Microsoft Corp’s corporate development group along with fellow Merus co-founder Peter Hsing.

Reached by phone, Merus’ Dempsey declined to comment on the firm’s future fund-raising

plans.

The total amount of money raised by U.S. VC firms declined year-on-year in 2008 and 2009, and will most likely show another decrease in 2010, according to Mark Heesen, president of the National Venture Capital Association.

Still, there have been a couple of high-profile new venture funds raised in recent months, including a $250 million fund focused on social Internet companies at Kleiner Perkins Caufield & Byers and a $650 million fund announced in November by Andreessen Horowitz.

According to the National Venture Capital Association’s Heesen, the increasing number of acquisitions of start-up companies and the improving outlook for the number of initial public offerings are providing the limited partners of venture firms with returns on investment that will help raise future funds.

“What we’re seeing is that checks are now being sent back to LPs and I think that will give them some positive encouragement to reinvest in venture,” he said.

http://www.reuters.com/article/idUSTRE6BM3YN20101223

Twitter Financing Raises Its Value to $3.7 Billion

Twitter has raised a big new round of venture capital, $200 million, valuing the company at $3.7 billion.

The financing brings the total raised by the three-year-old company to $360 million. It was last valued at $1 billion when it raised money in September 2009.

A new investor, Kleiner Perkins Caufield & Byers, contributed $150 million, and existing investors, which include Union Square Ventures, Benchmark Capital and Spark Capital, invested $50 million.

The fresh capital comes as Twitter tries to prove that in addition to being an Internet phenomenon with 175 million registered users, it can also be a serious business. It has recently introduced several types of advertisements, courted big businesses and promoted Dick Costolo, its business-minded former chief operating officer, to chief executive.

In an unusual move, a Kleiner Perkins partner did not join Twitter’s board, but the company did add two new board members: Mike McCue, a co-founder of TellMe and current chief executive of Flipboard, which transforms Twitter feeds into a more attractive format; and David Rosenblatt, former chief executive of DoubleClick, the advertising company now owned by Google.

The Twitter investment is a big win for Kleiner Perkins, a firm that made its name in the 1990s investing in Web companies like Google and Amazon.com, but was late to get into the social networking trend. Recently, it has been trying to join in, with investments in companies like the game maker Zynga and a new fund for social networking start-ups.

“As part of the Twitter team, we look forward to helping build the next great Internet treasure,” Kleiner Perkins said in a statement.

News of the investment was first reported by the blog All Things D. Matt Graves, a Twitter spokesman, confirmed the details, and Mr. Costolo wrote about the funding in a company blog post.

http://bits.blogs.nytimes.com/2010/12/15/twitter-financing-raises-its-value-to-3-7-billion/?partner=rssnyt&emc=rss

CDB Capital to launch $9 bln PE, venture capital fund

Dec 20 (Reuters) – CDB Capital, a unit of China Development Bank [CHDB.UL], said on Monday that it will launch a 60 billion yuan ($9 billion) fund of funds to support the country’s fledgling private equity and venture capital firms.

The fund of funds, the first of its kind set up by a state-owned entity, would include 40 billion yuan for private equity and 20 billion yuan for venture capital, they said.

CBD Capital was in the process of bringing in the national pension fund and some state-owned insurers as initial investors, executives said.

The yuan-denominated fund, which aims to raise an initial 15 billion yuan this year, will be closed by the end of 2011.

CDB Capital has partnered with Suzhou Industrial Park, originally a venture between Singapore and the southern city of Suzhou, to establish the fund, which will have a 12-year lifespan.

CDB capital, which was established in August 2009, is the only Chinese financial firm that has a licence to make equity investment, reflecting the powerful status of China Development Bank, which owns part of Barclays Plc (BARC.L). ($1=6.654 Yuan) (Reporting by Kevin Yao; Editing by Chris Lewis)

http://www.reuters.com/article/idUSTOE6BJ02Z20101220

Photo Sharing on the Go Is the Latest Hot Investment Niche in Silicon Valley

SAN FRANCISCO — In Silicon Valley, the three words on the tips of everyone’s tongues are mobile, social and local.

Add a fourth word and venture capitalists get excited: photos.

A flurry of new start-ups is focused on mobile photo-sharing, some of which plan to make money from local advertising. The smartphone apps transform cellphone photos so they look better, tag them with location data and post them in real time to social networks on phones and the Web.

The apps, like Instagram, Hipstamatic, DailyBooth and PicPlz, are generally free or cost a small amount. So far, they have been small-time projects for the people who built them. But now a few are trying to transform themselves into real businesses.

Mixed Media Labs, the company that makes PicPlz, will announce on Thursday that it has raised $5 million from Andreessen Horowitz, a prominent venture capital firm.

“It is annoying to take photos with your cellphone and have them look good and get them off your phone,” said Dalton Caldwell, co-founder and chief executive of Mixed Media who previously co-founded Imeem, the now-closed music site. “That solves a real need.”

PicPlz offers an Android and iPhone app and a Web site. People take photos with their phones and can apply eight different filters to change their look, such as “the ’70s” or “Russian toy camera.” They can upload them to PicPlz, where others can view photo streams from a particular user or location, so it is like a visual version of Twitter. They can also send them to Facebook, Twitter or Foursquare.

PicPlz is one of the newest wave of consumer tech products being built first as mobile apps, with the Web site as second priority — an idea that would have seemed foreign just a few years ago.

“I think for the next generation of companies, the application they deliver on the mobile side is way more important than the Web site,” Mr. Caldwell said.

He and some of the other photo app developers talk about still-vague goals of expanding the apps into mobile networks, based on location or groups of friends. Mixed Media plans to build many location-based apps.

Though Mr. Caldwell says he still doesn’t know exactly what the company will do, he knows what it will not do — repeat the mistakes he made at Imeem.

He sold Imeem’s assets to MySpace last year at a loss. He blames its failure on the impossibility of negotiating with music companies for digital music, but also said he made every mistake in the book while running it.

For example, he said he waited too long to figure out how to make money at Imeem. He plans to make revenue his first priority at PicPlz, possibly with location-based advertising.

He is also trying to avoid peaks and plunges in PicPlz’s growth. The app has been downloaded 130,000 times since the Android app was introduced in May and the iPhone app in August. Instagram, a competitor, was introduced last month and already has more than 300,000 users.

But Andreessen Horowitz chose PicPlz over the company that makes Instagram, called Burbn. Earlier, the firm invested small amounts of money in each, before Burbn scrapped its original mobile check-in service to focus on the photo-sharing app. But since venture capitalists avoid investing in competing companies, Andreessen Horowitz can’t invest in both as they are now.

As part of the investment, Marc Andreessen, co-founder of Andreessen Horowitz and of Netscape, will join Mixed Media’s board, a rarity since the other boards he serves on are much bigger companies: eBay, Facebook, Hewlett-Packard and Skype.

Even beyond the other photo-sharing apps, there are many other competitors. Facebook and Twitter are already hugely popular on cellphones, as are mobile services like Foursquare. And other apps, like TwitPic and Yfrog, let people upload photos from their phones to Twitter and other sites.

“It’s very hard to get people to pay attention when there’s so much noise,” said Greg Sterling, an analyst who studies the mobile Internet. “I think, by and large, they’re not going to be very successful, but there will be one or two that break out.”

http://www.nytimes.com/2010/11/11/technology/11photo.html?_r=1&partner=rssnyt&emc=rss

Twitter Raises $200 Million In Venture Capital

Microblogging site Twitter has raised $200 million in a funding round led by venture capital firm Kleiner Perkins, valuing the company at $3.7 billion.

This round of financing brings its total investments to $360 million. All Things D also reported that the company added two new board members Flipboard’s Mike McCue and DoubleClick’s David Rosenblatt.

In its earlier round of funding in 2009, Twitter raised $100 million from investors T.Rowe Price, Insight Venture Partners and Spark Capital, which valued the company at $1 billion.

Twitter has failed to deliver a business model as lucrative as Google and FacebookWSJ reported that Twitter will post $50 million in ad revenue for 2010, a far cry from Facebook‘s expected revenue of $2 billion for the financial year.

However, Twitter’s CEO Dick Costolo in a blog post termed the company’s growth as “Meaningful Growth.” Costolo said the users sent an astounding 25 billion tweets in 2010 and added more than 100 million new users. Also it grew to 350 employees from 135.

Twitter has been in search of a viable revenue model. Reuters reported that Costolo, speaking at the company’s Chip Developer conference in San Francisco, said its business model will be based on Promoted Tweets and commercial accounts.

Promoted Tweets will put ads on Twitter primarily in search results and later in user feeds on Twitter and other third-party clients such as TweetDeck and TwitterBerry. Costolo told Reuters that Promoted Tweets “are not ads. They will function just like standard tweets, in the sense that people will be able to favorite them and retweet them. Twitter spent a long time coming up with a business model that is ‘organic to the platform’ and can encompass partners as well as Twitter.”

Currently promoted ads are only visible on searches. Twitter had acquired search.twitter.com in 2008. Recently Twitter revamped the business end of its website offering forms that companies can use to express their interest in buying Promoted Accounts, Promoted Tweets or Trends. Advertisers were offered 5 categories of monthly ad budgets which included below $10,000 to over $100,000. The estimated campaign time included choices ranging from 1 to 4 weeks to 3 months.

Earlier it was reported that Twitter will allow advertisers to bid for key words on a cost-per-thousand basis. Also, the company is reported to be working on a pricing model called “resonance”, which measures the impact of tweet by metrics like how much a tweet has been forwarded, marked as favorite and how often a user clicks on the links received. Thus ads that are able to stay above the resonance score will stay in the circuit while the lower ones will discarded.

Another step in Promoted Tweets is syndication whereby it will make available the ad system to developers and other clients on a revenue sharing basis.

Commerical accounts allow businesses to pay for a specific Twitter account. Twitter also provides analytics and lets other users post on that specific account. Last month Twitter entered into partnership with social data streaming service company Gnip.

Under the deal, Gnip will offer messages to Twitter for $300,000 per year, ReadWriteWeb reported. But, the arrangement limits buyers’ information to only analyze the messages and not display them. However, Twitter is taking its time deciding how it can use the huge trove of its users’ personal data as it does not want to get embroiled in privacy issues which are dogging Facebook and Google.

There are other options available like the DellOutlet that streams tweets offering deals, possibilities that Twitter can cash on. Now that Twitter runs into its third year of operations and investors are pumping in money, they will put pressure on it to book returns.

http://www.ibtimes.com/articles/92885/20101216/twitter-venture-capital-business-model-google-facebook-ads-revenue-keiner-perkins-microblogging-twee.htm

DEALBOOK; A Dim View Of Betting On Start-Ups

A follow up article to yesterdays post:

”There’s too much money chasing too few deals.”

Sean Parker, the entrepreneur behind Napster and Facebook now turned investor, was talking about the state of the venture capital industry last week over coffee. At 30, Mr. Parker, who was recently portrayed by Justin Timberlake in ”The Social Network,” has been thinking a lot about innovation – or the lack of it – in the United States. And he’s come to a depressing conclusion about the money industry that he says used to be ”the engine of innovation” for this country.

”The risk-reward doesn’t work out in favor of putting money into venture capital anymore,” he said, even though he himself is a partner in a venture capital firm that owns stakes in Facebook and SpaceX, the private spaceflight company run by Elon Musk, a co-founder of PayPal. Mr. Parker, a night owl who had awakened before his usual rising time of noon to meet with me, the problem plaguing the venture business represented a ”systemic risk” to the country that he believed meant ”innovation could gradually grind to a halt or at least become less effective.”

Mr. Parker may tend toward hyperbole, but ever since the bursting of the dot-com bubble, there has been a steady drumbeat of ”venture capital is dead.” In the last year, however, that drumbeat has gotten louder as it has become clear that many of the best-known venture firms in Silicon Valley and elsewhere have returned a pittance to their investors.

According to the Cambridge Associates U.S. Venture Capital Index, venture capital retuned a paltry 8.4 percent return to investors over the last decade, starting in 1999. Ernst & Young reported last month that venture capital investing had fallen off a cliff this year, down 47 percent in the first half of the year compared with the same period a year earlier.

”You’ll see big old established firms that everybody thought were here to stay probably splintering,” said Mr. Parker. That’s in part because he is convinced that the industry’s biggest backers – institutional investors – are going to seek a haven elsewhere. ”I can’t name names but certain large university endowments have lost as much as half of their value,” Mr. Parker said.

For every Facebook, there are dozens of start-ups that never make it. That’s the model – it is all about swinging for the fences. Even Facebook, still private, having not pursued an initial public offering, has yet to see the big payoff for its largest investors.

One of the problems often cited for the depressing venture capital world is the perception of a tight market for I.P.O.’s. Bill Gurley, a partner at Benchmark Capital, which was an early investor in eBay and OpenTable.com, says he believes exaggerated expectations are the problem.

”We may also have a perturbed notion of what a healthy I.P.O. market looks like,” he wrote last week on his blog. ”The I.P.O. market of 1999 was a myth, a facade, a once-in-a-lifetime mirage that you will never see again.”

That the I.P.O. market is dead may also be a myth, however. It may just be Silicon Valley. Only 11 of the 42 high-tech, venture-backed I.P.O.’s since 2008 came from Silicon Valley. As Mr. Gurley pointed out, ”In other words, 74 percent of these I.P.O.’s hail from outside of the S.V. echo chamber.”

Silicon Valley’s latest, greatest hope – clean tech and green tech – also seems to be failing despite big investments from the likes of John Doerr of Kleiner Perkins Caufield & Byers and Vinod Khosla, a former Kleiner partner.

”It is not clear anyone will make money on their green-tech investing. It looks like it was a bubble, ” Mr. Parker said.

But worst of all, from the standpoint of innovation, entrepreneurs may be changing the way they are thinking – they are becoming less ambitious.

”Ten years ago, venture capitalists would ask the question: Do you want to build a company and flip it or do you want to build a company and I.P.O. it? It’s a trick question. The correct answer was always ‘I want to build an incredibly valuable stand-alone business and maybe we get bought, maybe we go public but we’re going to build an incredibly valuable company,’ ” Mr. Parker said. ”Now it’s actually not clear that that’s the right answer. There’s a lot of venture firms that are clearly interested in building something and selling it either to Facebook, Google, Microsoft.”

That’s not to say Mr. Parker is all doom and gloom. His firm may actually have another venture capital-backed winner on its hands in Spotify, an online music service that some analysts suggest could one day challenge Apple’s iTunes. But before you get too excited about great leaps in innovation in the United States, consider this: Mr. Parker didn’t discover Spotify in his backyard. It was founded in Stockholm.

Given his own status as a rock star entrepreneur, just how did Mr. Parker feel about Justin Timberlake’s portrayal of him in the ”The Social Network?”

Pausing for a moment, Mr. Parker reflected: ”It’s hard to complain about being played by a sex symbol.”

This is a more complete version of the story than the one that appeared in print.

http://query.nytimes.com/gst/fullpage.html?res=9400E1DA103DF930A15752C1A9669D8B63&partner=rssnyt&emc=rss

A Dim View of Betting on Start-Ups

“There’s too much money chasing too few deals.”

Sean Parker, the entrepreneur behind Napster and Facebook now turned investor, was talking about the state of the venture capital industry last week over coffee. At 30, Mr. Parker, who was recently portrayed by Justin Timberlake in “The Social Network,” has been thinking a lot about innovation — or the lack of it — in the United States.

And he’s come to a depressing conclusion about the money industry that he says used to be “the engine of innovation” for this country.

“The risk-reward doesn’t work out in favor of putting money into venture capital anymore,” he said, even though he himself is a partner in a venture capital firm that owns stakes in Facebook and SpaceX, the private spaceflight company run by Elon Musk, a co-founder of PayPal.

Mr. Parker, a night owl who had awakened before his usual rising time of noon to meet with me, said the problem plaguing the venture business represented  a “systemic risk” to the country that he believed meant “innovation could gradually grind to a halt or at least become less effective.”

Mr. Parker may tend toward hyperbole, but ever since the bursting of the dot-com bubble, there has been a steady drumbeat of “venture capital is dead.” In the last year, however, that drumbeat has gotten louder as it has become clear that many of the best-known venture firms in Silicon Valley and elsewhere have returned a pittance to their investors.

According to the Cambridge Associates U.S. Venture Capital Index, venture capital returned a paltry 8.4 percent to investors in the last decade, starting in 1999. Ernst & Young reported last month that venture capital investing had fallen off a cliff this year, down 47 percent in the first half of the year compared with the period a year earlier.

“You’ll see big old established firms that everybody thought were here to stay probably splintering,” Mr. Parker said. That’s in part because he is convinced that the industry’s biggest backers — institutional investors — are going to seek a haven elsewhere. “I can’t name names but certain large university endowments have lost as much as half of their value,” Mr. Parker said.

For every Facebook, there are dozens of start-ups that never make it. That is the model — it is all about swinging for the fences. Even Facebook, still private, having not pursued an initial public offering, has yet to see the big payoff for its largest investors.

One of the problems often cited for depressing the venture capital world is the perception of a tight market for I.P.O.’s. Bill Gurley, a partner at Benchmark Capital, which was an early investor in eBay and OpenTable.com, says he believes exaggerated expectations are the problem.

“We may also have a perturbed notion of what a healthy I.P.O. market looks like,” he wrote last week on his blog. “The I.P.O. market of 1999 was a myth, a facade, a once-in-a-lifetime mirage that you will never see again.”

That the market for initial offerings is dead may also be a myth, however. It may just be Silicon Valley. Only 11 of the 42 high-tech, venture-backed offerings since 2008 came from Silicon Valley. As Mr. Gurley pointed out, “In other words, 74 percent of these I.P.O.’s hail from outside of the S.V. echo chamber.”

Silicon Valley’s latest, greatest hopes — clean tech and green tech — also seem to be failing despite big investments from the likes of John Doerr of Kleiner Perkins Caufield & Byers and Vinod Khosla, a former Kleiner partner.

“It is not clear anyone will make money on their green-tech investing. It looks like it was a bubble, “ Mr. Parker said.

But worst of all, from the standpoint of innovation, entrepreneurs may be changing the way they are thinking — they are becoming less ambitious.

“Ten years ago, venture capitalists would ask the question: Do you want to build a company and flip it or do you want to build a company and I.P.O. it? It’s a trick question. The correct answer was always, ‘I want to build an incredibly valuable stand-alone business and maybe we get bought, maybe we go public but we’re going to build an incredibly valuable company,’ ” Mr. Parker said. “Now it’s actually not clear that that’s the right answer. There’s a lot of venture firms that are clearly interested in building something and selling it either to Facebook, Google, Microsoft.”

That’s not to say that Mr. Parker is all doom and gloom. His firm may actually have another venture capital-backed winner on its hands in Spotify, an online music service that some analysts suggest could one day challenge Apple’s iTunes.

But before you get too excited about great leaps in innovation in the United States, consider this: Mr. Parker didn’t discover Spotify in his backyard. It was founded in Stockholm.

Given his own status as a rock star entrepreneur, just how did Mr. Parker feel about Justin Timberlake’s portrayal of him in the “The Social Network?”

Pausing for a moment, Mr. Parker reflected: “It’s hard to complain about being played by a sex symbol.”

http://dealbook.nytimes.com/2010/11/22/a-dim-view-of-betting-on-start-ups/?partner=rssnyt&emc=rss

As Venture Capital Business Changes, Elite Firms Move to Keep Their Edge

For the Silicon Valley cognoscenti, the news last week that Mary Meeker, the stock analyst once dubbed “the Queen of the Net,” was abandoning Morgan Stanley to join the Kleiner Perkins venture capital firm seemed about a decade overdue.

But the timing actually underscores some big changes in the venture capital business, and the increasing pressure that even marquee names like Kleiner Perkins Caufield & Byers face in a business that has always been tougher than it looks.

You wouldn’t know it from all the buzz surrounding the new wave of social media and mobile start-ups, but the total dollars invested in venture deals is just a fraction of what it was during the Web 1.0 frenzy — down, even, from 2008 levels.

Meanwhile, a new breed of “superangels,” many of them entrepreneurs who made large fortunes at venture-backed companies, is impinging on traditional venture capital turf. Plus, the global nature of the Internet business means that Silicon Valley venture capitalists, who once held that you should invest only in companies you can visit by car, now face a broader, more complicated playing field. (One of Ms. Meeker’s assets is deep knowledge of China.)

Against this backdrop, the winner-take-all dynamics of the Internet business, and the fact that venture sectors like clean tech and life sciences are struggling, mean that if a prestige venture capital firm misses out on too many of the big Internet deals, it hurts. Kleiner Perkins, notably, was not involved in Facebook, Twitter or Groupon (though it does have a piece of Zynga). Kleiner is now said to be desperate to play a lead role in a what’s expected to be a huge new financing round for Twitter.

For Silicon Valley Internet entrepreneurs, the changing dynamics of the venture capital finance business are not a bad thing. Starting an Internet company these days usually requires much less capital than in the past. The emergence of the superangels, combined with venture capitalists’ hunger for early-stage deals, means better terms for company founders.

For big, successful start-ups, these are also good times, in that the large venture capital firms are moving upstream into what would once have been considered private equity territory, with financing rounds in the nine figures. That gives companies like Twitter and Facebook a lot of options other than going public.

But for many rank-and-file venture capitalists, life is not so good. The institutional investors that are the backbone of venture capital finance — pension funds, insurance companies and university endowments — have generally seen poor returns on these investments over the past decade. That means it’s hard for venture capitalists to raise money.

The industry as a whole is shrinking: the number of venture capital firms in the United States has declined from a peak of 1,023 in the mid-2000s to 794 today, according to the National Venture Capital Association. The amount of money under venture capital management has declined even more. Meanwhile, local venture capitalists are facing new international competitors like DST out of Russia as well as shrewd, Internet-centric domestic rivals like Union Square Ventures, of New York, and Foundry Group, of Boulder, Colo.

At the elite end of the business, though, there is still plenty of clover on Sand Hill Road. A big name like Marc Andreessen, the Netscape co-founder who has shown as good a touch for investing as he did for software development, can raise a fund of $650 million, as he and his partner, Ben Horowitz, just did, without much trouble.

The longtime Valley kingpins — Kleiner, Sequoia Capital, Accel Partners — can aspire both to dominate the glamour deals and to cherry-pick among smaller opportunities, though they can’t rest on their laurels. Kleiner has started special funds for iPhone apps and social media deals.

Indeed, even John Doerr — the Kleiner partner whom Fred Wilson of Union Square Ventures called “the Michael Jordan of venture capital” in a joint appearance at the Web 2.0 conference — has to be very aggressive in this climate.

And that brings us back to Mr. Doerr’s friend, Mary Meeker. Whether she will be a good venture capitalist remains an open question. But she has already added some sizzle for Kleiner, helping solidify its position on the very short A-list of firms that almost any sensible entrepreneur would want in a deal.

In this case, what’s good for Kleiner is good for Silicon Valley.

http://www.nytimes.com/2010/12/05/us/05bcweber.html?_r=1&partner=rssnyt&emc=rss