wow first comment...
Well lets see who gets burnt, eh?

The only thing that's missing...

Due to SOX, why will companies go public anymore? At least in the USA...

So, if someone wants to play the new game, the best way is to find a niche that is interesting for the VCs - research what they buy - and fund a company different than the other companies in the niche - but not that different,only enough to have the VCs think of them as fresh blood, new pool of ideas for what they already have - and wait....
sure, it needs some revenue, but advertising might pay for it and do the trick - effectively being the barometer of public interest and fueling VC interest. Do the same thing few times and some cash will stick on you.....now, i'll go and write a book about the scheme :)

Hmm. Interesting info. As someone who is trying to use the internet to make money this is truly an eye opener.

Sure there are peices missing from this model but that can be figured out.

Thank you.

As Milton Friedman said in "Free to Chose", regulation only helps the *regulated* at the expense of the consumer. It's Coase's theorem (the fundemental theorem of microeconomics, even): as transaction costs rise, so too does market entry and thus firm size.

Given the exponential financial regulation of enterprise these days, it's not like there's too much difference between state and business anymore. Pretty soon we'll be transfer-pricing all assets instead of trading them in free markets, and we'll have five-year plans, just like Stalin used to do. ;-).

"A 'prince' is a bandit who doesn't move"-- Mancur Olsen, 'Power and Prosperity'

Haveyou seen this?

http://blogs.zdnet.com/Murphy/?p=756

So there is nearly a trillion out there for VCs to throw at new companies. If I were one such venture capitalist, I'd take an old school approach to this hunting ground: make sure any new businesses are profitable AND useful, and not just the next cool app; Not invest in anything that I myself would not use, and look beyond the immediate future of the technology base to be invested in. I would avoid the "sexy" factor of investing in and industry because it's cool or hip-that stung millions when the dot-com bubble burst, and by all rights, it should have.

In other words, do a lot of research on the tech and people behind it at a particular company before investing. if the advertising and marketing package is more impressive than the startup, invest in the ad agency instead.

just to remind you of a little nugget of info that escaped from this article..

Sequoia put 12million of money into youtube in the year prior to the acquisition by google which is.. well.. a sequoia portfolio company.

one has to wonder how much influence sequoia has in google these days. but I guess that then, as is now, sequoia is pretty influential in deciding what google buys.

If there's a spare $1T going around, I'll have it. I promise not to produce any products or turn a profit.

Mark,
Your idea is a good one except that the VC business model is not set up for that kind of thing. It's based on the premise of getting out in 5-7 years with a huge win (partly to compensate for all the ones that didn't work). And it usually requires sexy and trendy to do that. The jury's still out on whether it also "requires" that people get stung or that's just a natural by-product.

What you're describing used to be the angel investor model, but lately even those folks are following the VC model.

What's typically missing is a way for investors to get profits out of a company that's successful without having to have a "liquidation event" (a sale or an IPO). That's what I'm trying to accomplish in the angel deals I invest in. So far I'm in two and a half. One's working out well. The other is too new to tell. (Meaning the company's going well but too soon to see if profits materialize with a good rate of return) and the half has yet to be consummated.

Good insight though.

Roll up! The very term makes me ache. In the late 90's Mike Milken and Larry Ellison opened up offices on Sand Hill and sunk a few hundred million into Knowledge Universe. They and bought 50 or so smallish IT training companies, one of which was mine. We took mostly privately traded stock for it and enough cash to take a year or two off.

To make a long story short, Milken drove away the good people, hired cronies and burned through $250 million between 1997 and 2003, when we finally settled for a penny on the dollar. Am I the only entrepeneur in the IT business who didn't get rich in the late 1990s? Oh well, bags of money aren't everythng!

The URL has more to do with P2P and video downloading than the VC issue, but it goes along the lines of many of Bob's columns and thought some of you all may be interested in MIT's view of the future of the Internet. Enjoy!

http://www.technologyreview.com/BizTech/17904/page2/

And here's the URL.

The guys at Sand Hill Road will have not trouble investing their $1 Trillion. Most of it will go into alternative energy solutions. Start-ups in this field need $100 mil in start-up funds and can IPO.

RAH - Heavy regulation, are you kidding? Corporations own America these days...

Sure, SOX is a PITA, but compare that to the benefits for corporate America today.

Corporations pay less tax than ever before, while many announce record profits.

In some industries (think defense), there have been so many mergers, there's pretty much no competition.

The financial industry has many Americans bent over and grabbing their ankles for the rest of their lives.

You can get amazing ROI on Congress for (what you spend in campaign contributions vs. what they then buy with government $$).

You can continue gouging western consumers while outsourcing labor to cheap Eastern workers.

Environmental regulations are being rolled back left and right.

The list goes on and on, but you're insane if you really think we need LESS regulation.

Every once in a while, you hit one right on the head, and this is it. I see it all around me. Not all the VCs see it yet, and a lot of the entrepreneurs still think they need money when they don't but it is changing very fast!

I agree with Tim above. Rather than looking at 10 times returns from just IT companies, VC must come down and accept 3 times returns and invest in other things that require investment - like Tim said, Alternative energy, microfinance, etc .

I wrote an article related to the current bubble scenario here.
http://mediavidea.blogspot.com/2006/12/why-google-yahoo-and-microsoft-should.html

Mr. Cringely: Could you provide some (or at least one) concrete example to support your rollup thesis? I'm not attacking your argument; I'd just like to know specifics. e.g. is one investor or group of investors snatching up YouTube clones as part of a rollup strategy? If so, who?

As an entrepreneur, your options for a liquidity event are now largely limited to selling out to one of the big 3, or a tech-hungry media tycoon. I have to suspect that at least some of corporate America digs that...

To print or not to print, that is the question.

In looking at the html displaying your column I notice the "body" of the column is all in one well marked place. The only thing it is missing is the title, its elsewhere. It would appear to me it should be possible to extract the title and body of your column into a separate html file that could be displayed in a separate window and/or printed.

Maybe sometimes we try too hard to create an elegant solution when a simple one would be good enough.

How the hell is Ajax related to all this?

Yes - it's all about money. The Vulture Capitalists don't want to give back the money to their investors. And if they don't make money, that's what the investors will expect, and you end up with a bunch of out of work vulture capitalists.

And no one wants to be out of work!

"The guys at Sand Hill Road will have not trouble investing their $1 Trillion. Most of it will go into alternative energy solutions. Start-ups in this field need $100 mil in start-up funds and can IPO."

Alternative energy is way too long-term. There's no way VCs are going to throw money at things that'll take five to ten years to even be sure of the feasibility, much less see ROI. Also, alternative energy needs huge sums of money for each prospective idea, which means the VCs would have to put all of their eggs in very few baskets, which they are (understandably) loathe to do.

This is not to mention the fact that the VCs have even LESS of an idea about what makes a good investment in alternative energy than in IT, which gives most of them less incentive to try it.

I think many VCs must be frustrated that you don't need millions to fund a start-up anymore. In fact many can be funded purely by the founders. There was an interesting article called "Craigslist Meets the Capitalists" that highlights the VCs dilemma.

If I were one such venture capitalist, I'd take an old school approach to this hunting ground: make sure any new businesses are profitable AND useful, and not just the next cool app;

That would make you NOT a Venture Capitalist - you'd be a plain old investor. For starters, if the business is already profitable - then what do they need a VC for? If they need to expand, they can simply get a loan from a bank - and maintain their independence without having to give lots of company value to the VC.

The nature of the VC game is finding something risky and sexy that no-one else values, and quickly turning it into a sensation. Investing in stable, profitable companies doesn't play to what VCs do.

The notion that businesses ready to expand can then turn to bank loans is naïve. Rumbling locomotives, not post-launch rockets, draw sufficient capital from banks. Roll-ups make more sense for private equity funds to pursue: big-big investments, usually quite a few years to bring to fruition, and often the need for orchestrating broad influence or the capacity to attack national if not global markets as a whole. The risks plus the eggs-in-basket dictum, actually the same thing, keep VCs away from this brave and difficult game.

VCs should focus more on two models for success, best pursued together, but not necessarily both on behalf of the same enterprises: (a) many under-$1m investments in startups with technology shifts and consequences of sudden market reconfigurations as model characteristics, and (b) rapid scaling of successful businesses with the principal contributions being capital, incremental organisation and connections to enterprises already scaled. In the scaling model, founders are either a primary reason for the selection and will drive the scaling, they will remain but in non-driving capacities, or they will leave. Deal structures will evolve into less punitive treatment of the distinctions.

The earlier entry model for VCs tended to be larger first-stage and joined by others at the second or third stage. I think what we'll see more of in the future is more scaling with multiple forms of investment and financial partners, coupled with fewer nominal stages. It will become harder to identify the most scalable investments, especially after profitability is achieved, but the rewards will more often exceed the added risks as global markets and supports of many industries become more reliable. There will thus be more incentive to ride longer and invest more heavily in later stages, though not to the extent that equity funds are (increasingly) comfortable doing.

More VCs will look and act in the future like today’s equity funds, but the gap will remain wide. The larger and more daring equity funds will have moved on to more global stages and thus more complex source and distribution models.

John (Sean) Withrow, Hong Kong

I think the VC's are in trouble; but one way they could spend their money AND potentially find their golden eggs is to hire some creative business analysts and a market research arm.



They still get the six hundred proposals, but the cream is skimmed off the top. So the answer is stop demanding perfection on all counts. Change your filter so that instead of assuming you will find 0.5% of deals (and thus reject 99.5% of deals on anything that doesn't sound like a perfect story), assume you want to fund 10 to 15 projects, and adjust your filter to extract the 30 to 45 projects with the most potential.



Then spend some money. Put $100K into each of those 30 to 45, but not as an investment: Do it as private research into seeing if the flawed model can be fixed, if market research indicates there is any "there there", if the company in question could veer into a truly profitable direction.



I'm not just talking about due diligence; I am talking beyond that. Take as a given their market research is bad, their competitive analysis is spotty, their financial assumptions are without foundation, their marketing plan is feeble and the people in charge are ineffective leaders and managers. All those could be fixed. The question is, are they worth fixing? I think VC's do not see themselves in the business of fixing such problems, and this is why only 0.5% of the deals they see get funded. I find it hard to believe that 199 out of 200 business plans that make it to the desk of the VC are just plain bad ideas.



Of the 30-45 investigated most will be flops, but you should be able to get 10 deals that can be polished into a worthwhile gem. And the good thing about these 10: Nobody else is rushing to finance them, and your private research and alternative business plan remains your own.



So you buy in cheap, funding 10 companies for what it used to cost to fund 3, and get a more pliable existing management. You rewire the company according to your team of experts, and it doesn't have to be nearly as successful to kick back a good return, and you will have more control because you won't be dealing with prima donnas that have alternatives.



The rest is just lawyering. Have fun, boys and girls!

On a not unrelated note, Sasha Baron Cohen, aka Borat, just financed his next project with first VCs then resold the project for better than double to Universal the following week thus covering his Wall Street investor's nut and then some in less than ten days. Yowsa!

Of course his timing couldn't have been better as Borat was still packing them in at the cineplex and geez, the next one's going to be just as fab, right?

On the surface it seems that Sasha wasted his time by going to VCs first when he could of just shopped the studios with Borat doing so well. BUT, the fact is he made a butt-load of dough for some suits and that means that ALL the suits on Wall Street took notice. Stay tuned... don't touch that remote...

The problem with most of today's VCs is that they simply don't add any value other than money which is in rich supply. This lack of value is revealed in X-ray high contrast when the startup gets into trouble and unfortunately most startups do get into some near death experience. At that point a comparison of the value add statements they made to their LPs should be compared with they actually do when the shit hits the fan.

The main problem with the dot.com boom was that every idea was touted as the 'next killer app' but no one actually did much checking into how it would all WORK.

We also saw this happen during the 1847-1880 Gold Rush - a land speculator would find a 'good looking claim', salt it with gold dust or ore already procured, then run up the flag and see who saluted. It was irrelevant whether the claim would produce any ore of its own; the speculator just wanted to get folks to invest, so's he could take his profits and go on to the next one, leaving the investors high, dry, and broke.

However, those who looked into the claims that HAD potential, hired geologists to check out the claim, maybe even opened a bore or two to see if any veins found were worth mining... those were the ones that eventually succeeded. They weeded out the garbage without getting fleeced, and the good claims were then able to be worked.

We should apply the same strategy to tech venture capital and IPO's. Instead of throwing gobs of money at every nifty idea that shows up, we research the plausible ones, develop the good ones, and reap the rewards when they begin to deliver goods and services that people will actually use.

Just like the automotive supplier industry. My company was just snatched up by an equity fund and this is exactly what their history is.

So maybe the Tech industry is mature and now acts like any other.

I think that you have captured exactly what happened to Intergraph. As a software company, they were in a lot of trouble. As a hardware company, they were even worse off, and only had some patents that they could rely on. They were bought up by some private equity group, and the only strategy that I can determine is that they will be taken public again at some point down the road. No new announcements of technology or investment have followed, so it would appear that one way or another, they will be sold again when they are worth more.

There's a time in every market - the ground floor - when, if you get in, you can make a killing. Apple was started when the concept of making a computer out of a few chips was in its infancy, and the question was "why would anyone want these?". Remember HP reliquished their claim to Woz's idea because they saw no money in it... By the time IBM started mass-producing them, it wasn't a $37.500 garage business any more. Oh, and Apple's brilliancy was making a disk controller with 1/10th the chips by drafting the CPU to do the work.



The dot-com boom was a recognition of this "get-in-at-the-ground-floor" potential. In a totally incomprehensible business, the only obvious thing was that the weirdest ideas might work. After all, who wouldv'e predicted MySpace or YouTube even in 2000?



The problem with any boom or bubble - internets or tulips - is that there's a pile of money that wants to go somewhere. It wants to make more money than simple interest can provide. As money flows into an industry, others mistake the venture capital being spent for actual productivity. Others assume something is happening and rush to jump in, making a bigger frenzy. Like any Ponzi scheme, eventually this has to end. The higher the jump, the madder the rush, then the bigger the fall.



But, the computer/"Internets"/data business still has some serious potential for some sort of business startup to be the next Amazon or Ebay. Like Apple, like Commodore, like Radio Shack, like Visicalc, like Microsoft - the market belongs to the first one or two in, and from there, it's theirs to blow it or go big.

"AutoCAD 14 -- the most successful release ever of the world's number one CAD program."



R14 was a huge success mainly because R13 sucked so badly (slowness on the Windows platform). R11 was fast, but was DOS-based. I don't even remember AutoCAD 12.

There is an alternative, or perhaps related hypothesis, that suggests that the VC model is changing because of the cost and difficulties of the SarBox and FD regulations for public companies. See WSJ 12/21/2006 article -

http://online.wsj.com/article/SB116667005208856400-search.html?KEYWORDS=venture+capital&COLLECTION=wsjie/6month

I would be curious to hear how you think the premise provided in this blog relates to the regulatory aspects of going public.