Sex And The Single Zillionaire

This is the title of a new book by Tom Perkins, one of the pioneers of Silicon Valley, whose name is on the esteemed firm Kleiner Perkins. This week, the MIT alumni association honored Tom at the Spotlight ’06 event, and Tom delivered a screwball speech which had the entire audience rolling with spontaneous laughter. With great stories, he took us through his life, and some of the history of venture capital, made fun of himself, others, and us.

Long ago, in a galaxy very close to us, the largest venture fund, Kleiner Perkins, had $8 Million to invest. And with that, the pioneers of Silicon Valley, built companies like Cisco, Apple, Genentech, and much later, Google, Yahoo, and Amazon.

As I sat in the audience, listening and laughing, some random thoughts flew through my mind …

In 2006, the classic venture capitalists have pretty much shunned the notion of risk capital, in favor of growth capital.

Today, there is a lot of activity in very early-stage, built-to-flip venture capital, where from the get-go, the assumption is not to build a company, but to focus on making a quick million or two. This happens to be the territory of Angels and very small venture funds. Even VCs do this sort of investing on the side, with permission from their partnerships. If, however, the seed investors don’t succeed in flipping the deal quickly, and it ends up requiring more money, they often get washed out. Typically, these kinds of deals don’t have a lot of barrier to entry, and there are about 5-8 of each kind fighting it out. These “Built-for-Google” type deals are everywhere in the valley right now. Ron Conway and Reid Hoffman are its best practitioners.

In this mature market, also, those companies that have reached revenues above $15 Million, and in their history, have already burnt $20-$30 Million, but do not have the built-in scalability to get too much beyond $50-$75 Million, are in no-man’s land. The large companies don’t like acquiring these businesses, because they are too expensive. On the other hand, they are too small to become sustainable public companies. Cases in point: CoWare in EDA, Chordiant in Enterprise Software.

Enter Private Equity. String together some deals of the first category, and call it Venture Buy-Out. If the roll-up can open up a large new market opportunity, that’s one way to build a real company.

For the second category, however, life continues to be more difficult and complicated. Private Equity investors don’t necessarily want to buy businesses whose growth is slowing. If there are smaller, “micro-capitalized” companies out there that can add some throttle to a slowing business, then, again, a Venture Buy-Out may turn out to be the best route to take.

Finally, the entrepreneurs out there who have the ambition to build a real, large, multi-billion dollar company – should know that Silicon Valley has changed fundamentally. Highly speculative, capital intensive deals that require 5-7 years to build, are less popular these days. Especially, if you have a contrarian, one-of-a-kind business idea that goes against the grain of the prevalent trends, investors will ask you to find ways to either diminish the capital requirements, or reduce the startup risks.

Your answer may well lie in that category of “Built-to-flip” or “Built-as-an-accident” deals, from which you weave together a Venture Buy-Out quilt.

I am working on one of these right now. In some strange way, my motivations are similar to the growth investors: leverage!