Thursday, August 31, 2006

Peter Rip Tears It Up

I've referenced Peter Rip of Leapfrog Ventures here before. Excellent writing style. Quality posts can be found on his blog.

His latest is a series of posts talking about "Venture Capital 2.0".

The first installment talks about the Cycle and Key Success Factors of the Venture Capital industry to date. The last 10 years have brought us both bubble and bust. Yet, the industry continues to thrive and survive. VC firms largely did not go out of business after the bust and Limited Partners continue to pump money into VC partnerships, likely hoping for more boom times. But, realistically, when will a boom time return? The IPO market is largely dry, so VCs look to mergers and acquisitions for exits. The good news is that the great firms (like Google) can go out regardless of the market conditions and there is still irrational exuberance in the M&A space (witness Skype). All these things lead to what I call the "Limited Partner Drip". It's like a drug. Just give me one more giant exit, then I'll let it ride.

Peter argues that the problems with Venture Capital 1.0 are largely structural. He would know much better than I. I think the LPs have the power to limit the supply of money they feed to this asset class, or to get more strict with the (fairly high) management fees that they pay. I.e., if Venture Capital 1.0 has structural problems, those problems can be addressed by a VC firm offering the LPs a different "product". The VC product has been largely unchanged for 35 years. I look forward to more thought provoking stuff from Peter.

In Peter's next installment, he talks about the LP Conundrum. The thing that always gets me about this industry is the parallels between LP<->VC-Firms and VC<->Portfolio-Companies. I am working on a post about this. The business models are different, to be sure, but there really are many similarities. Peter touches on one of them (when the "VC" becomes the "entrepreneur" trying to raise money for their firm from LPs). Peter ends with:
The typical VC fund attributes are size, industry, stage, and geography. These attributes past for strategies in most fund raising conversations. My next post will deal with why I think this is mostly flawed, for both VCs and LPs.

I look forward to the next installment!

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