Technology, Venture Capital, Private Equity

It appears that after nearly 3-4 years of frenetic activity, VCs, entrepreneurs and technologists are entering a phase of self reflection. Ref. – Fred Wilson’s piece, Read Write Web et al. The dampening impact of the sub prime crisis is already too well documented for further elaboration. The big question now is whether and to what extent will the spill over to the tech world happen. (Worth mentioning here that real estate and financial institutions happen to be big advertisers on the net and needless to say that both of these sectors have been thoroughly whipped by the current turn of events). Coincidentally, I was watching an interview of Henry Blodget, one of the alleged villians of the previous dot com bubble (along with some others of his Analyst/IB ilk such as Frank Quattrone, Jack Grubman, Mary Meeker etc – all employed by blue chip Inv Banks on Wall St.). And he admits there that back in the 1.0 heydays, things had gotten so hyped up and the whole air so full of pretension that everyone “understood” what was happening, that for someone to seem unbelieving or doubting was like signalling to the world that they had fallen out of tune with the times. In such situations, it takes a proverbial simpleton to call the bluff on the emperor’s new clothes. While VCs aren’t particularly incentivized to play that role (if anything they are highly incentivized to do exactly the opposite), I have decided to take that risk in any case. Consequently, I have to admit here that as far as YouTube goes, I “still don’t get it”. I will in fact go a step further and say that some of the froth we see today has been an indirect consequence of this “YouTube effect”. And I say this with full realization of the fact that the emperors we are talking of here are no ordinary ones either – one of the most revered VC firms on the planet – Sequoia and the world’s largest “startup” with a $160 bn mkt cap – Google.
I still fail to understand the vision with which Sequoia invested in this “company”? Of course, any VC would probably give an arm to make a 40x return on investment. And in that sense, Sequoia has fulfilled its fiduciary obligation of making the best possible returns for its investors. However as past excesses have painfully taught us, short term gain sans long term value creation, no matter how attractive is detrimental to everyone’s interest. And I am not the only one wondering whether YouTube would ever make for a sustainable long term business – see Randy Komisar’s (KPCB) interview. Further, as this Forbe’s article suggests, although online video viewership is exploding (it’s reported that YouTube alone accounts for 10% of all internet traffic), associated advertising still accounts for a platry 3.6% of all online advertising and that statistic is not changing in a hurry. Attempts by Google to monetize their acquired property have met with lukewarm response at best and added to that, it is becoming arduous to keep track of the number of IP infringement suits they are getting slapped with these days (TAFKP being the latest!). Yet, on the other hand, the “successful exit” of YouTube has spurred VCs to invest in scores of other clones and variants of YouTube and entrepreneurs are only too happy to graciously accept their largesse. In a sense, its deja vu all over again – the “Catch the eye balls & build to flip” motto with scant regard to business fundamentals that was the chief characteristic of an age that we aren’t particularly happy remembering.  Slowdown is but a natural corollary to the above – after all, how long can various financial stakeholders keep playing this “pass the valuation parcel” game. The only billion dollar question that remains is – how hard is the landing going to be?

PS: I thought I should add that it may be unfair to single out YouTube alone for the irrational exuberance this time around. Afterall, lets not forget the “Social <_ _ fill in the blanks _ _>” madness sweeping the online world as well. YouTube just happens to be a convenient proxy for something that epitomizes the resurrection of the 1.0 bubble mentalities.