A VC Calls It Quits

Justin Hibbard

Howard Anderson, co-founder of Boston VC firms Battery Ventures and YankeeTek Ventures, is quitting the VC business. In the June issue of MIT Technology Review, he has published an apologia of sorts explaining his decision. In characteristically left-brain fashion, he lists five reasons why he believes the VC business is broken for good. The most interesting one is number four: "These changes in venture funding are structural, not cyclical." In other words, VC is not just at the bottom of a bad business cycle that will inevitably turn up. The bottom is the new normal.

Of course, that's what people said at the top of the Internet bubble (this time, it's different--really!). Remember how the "new economy" was supposed to be a structural change? Business cycles are forces of nature that progress regardless of what we mere mortals do or say. Still, Anderson supports his claim with some interesting points. To wit:

It takes about $30 million to get a startup software company to break even--and even great software companies rarely grow more than 100 percent a year. In irrational times, a software company with $30 million in sales would have been worth $180 million, or 600 percent of a VC's investment. Which is good, but not great. Unfortunately, in rational times, the company would be worth $47 million to the investors, or only 157 percent of their investment. But that's over five years! Per year, it's a return of only 11 percent--and that's for a winner.

Another interesting reason why Anderson is quitting: "The hype machine is broken." Technology sellers have used up all their best jive-talk, and buyers no longer believe them. Remember how Y2K was going to bring Armageddon unless corporations shelled out for new systems? Remember how Amazon.com was going to put Wal-Mart out of business unless Wal-Mart went dot-com? Those tall tales helped fuel a backlash that was summed up in Nicholas Carr's infamous Harvard Business Review essay, "Does IT Matter?" Today, there are few compelling reasons--true or fabricated--for companies to make major investments in tech.

Finally, Anderson echoes comments made recently by Norwest Venture Partners general partner Promod Haque (who, as far as I know, has no plans to quit VC). There are too many VC firms funding too many companies, and there's not enough demand for those companies' products.

Is this a case of sour grapes, or is Anderson on to something? Submit your comments, please.