July 23, 2004

The View from the Top?

Attended the San Diego Venture Group's View From The Top breakfast panel session on Thursday morning downtown at the Hyatt Manchester Grand (or is it Grand Hyatt Manchester . . . or Manchester Grant Hyatt?). I was amazed at the turnout: hundreds of people showed up, to hear David Ryan of Mission Ventures and Steve Domenik of Sevin Rosen share their secrets from inside venture firms.

The first question from the moderator reminded me of blogger's or social-software conferences where the big theme is, "What's a blog?" or "What is social software?", as if that really had to be discussed!

What was the moderator's first question? "What is venture capital?"

Talk about a FAQ . . . Think about it. This is the San Diego Venture Group. Most of the members are VCs, or attorneys or financial advisors who work closely with VCs. And the rest of the membership is entrepreneurs like yours truly, who if they've joined SDVG prolly have been there / done that enough to know what venture capital is.

And sure enough, they spent ten minutes talking about what venture capital is and what it isn't. If this were a plumbers panel session, it'd be like asking, "what is plumbing?"

I continue to be amazed at what I hear at some of these get-togethers that hundreds of people turn out for.

Happily, it got better as it went along. I was pleased to learn that Sevin Rosen will do seed and very early stage investments (he even mentioned they've done $50k and $100k level deals... geez, that's smaller than angel level!).

Some various tidbits I heard over the course of the hour (SD = Steve Domenik, DR = Dave Ryan):

  • SD spoke about how the venture capital "industry" is about $10billion in the U.S. That may seem like a lot, but it's a drop in the overall bucket. The huge corporate pensions, university endowments, and statewide pensions like CalPERS invest gazillions in more stable, lower-risk instruments, and just dip a toe in the higher-risk "private equity markets" such as VC.

  • Asked if Mission Ventures had an org chart, DR said no, they didn't. May be, but like any organization, there's certainly a pecking order.

  • SD described his role as "cat shepherd" --- making sure the other partners do their meetings and get stuff done each week. He admitted that Sevin Rosen had "a really broken management structure" that is a lot better now, since they "hired a shrink" to go around and inteview everyone

  • SD described Sevin Rosen as "for years we were 5 or 6 middle-aged white guys from the chip business", but it's become more diverse more recently

  • SD said there are about 30 companies in SevinRosen's portfolio, averaging $10M each in terms of investment (although some are way less and a few even more).

  • Of the 30 companies, SD described the breakdown as follows: "one third are dead", where the companies never really even took off; "about 15 percent are walking dead", providing a ROI of less than 2X; and the rest of the companies offer a "greater than 2X" ROI. "Very few really big winners," he added. "At the end of the day, it's a 'hits business.'"

  • Random SD quote: "Right now, in fundraising, grey hair is the flavor of the month."

  • The management fees average between 2% and 3% at a VC firm. SD: "You have a pretty tidy income if you don'e come to the office. I've tried to squander it as best I can!"

  • For the larger VCs with say $2B under management, "two percent of two billion dollars is a lot of money."

  • SD spoke of the "carry" --- at Sevin Rosen, "we get a piece of the action if we make a profit -- 20 to 35% of the profit we get to keep".

  • DR described Mission Ventures' carry: if the fund is X, and the fund returns 3X, the gain is 2X, and the carry is 20-30% of 2X, or .4 to .7X of the fund. At which point the moderator of the panel, John Otterson, said, "Sounds like a good business." DR's response: "It is."

  • DR had a funny anecdote about you never know who these limited partner investors are: one time he had a pension fund investor named Pennington he was trying to reach by phone. He reached him: Pennington answered as "Detective Pennington" --- turns out he was a cop, who on the side was managing the pension funds!

  • SD: "A good limited partner sends checks and you never hear from them"

  • SD: "Entrepreneurs by nature need to be hopelessly opportunistic."

Posted by brian at July 23, 2004 10:10 PM

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