NWVA won't raise new fund, Simpson says VC model is "broken"

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NWVA won't raise new fund, Simpson says VC model is "broken"

One of the oldest venture capital firms in the state will not raise a new fund, a decision that Northwest Venture Associates founder Tom Simpson said was driven in part by the tough economics now facing venture capitalists.

"I think the fund model is very broken for a variety of reasons," said Simpson. "One, there is just too much money out there... As a result, valuations are getting bid up. Number two, you are seeing a huge number of 'me too' companies being formed... Thirdly, the exits, quite frankly, just aren't there. How many IPOs have there been in the Northwest in the last year and half?"

Simpson thinks the venture model is broken

Simpson isn't the only venture capitalist claiming that it is tough to make money these days. Last fall, Sevin Rosen Funds made headlines when it decided to return up to $300 million to its investors because of the lack of initial public offerings and acquisitions, the primary methods by which venture firms cash out of their investments.

Last year, Simpson -- whose active portfolio includes Confirma, Sur La Table and SinglePoint -- aborted attempts to raise a specialty fund that would have invested in later-stage companies in the non-tech sector. That's an area he believes is ripe with opportunity, though Simpson says that it is "just not sexy enough" for the large pension funds, corporate partners and universities that typically support venture capital firms.

"If you are going to invest off the beaten path, you are not going to get institutional support," he said.

As a result of the failed fundraising efforts, Northwest Venture Associates will not renew the lease on its Seattle office later this month. It will maintain an office in Spokane, where the team of four plans to support 16 existing portfolio companies. But no new investments will be made from the $133 million fund that NWVA raised in 2000, though Simpson said he will continue to invest his own money in startup companies. He also participates in a small angel group in Spokane called Win Partners.

Meanwhile, Kevin Barber, a former investment partner with the firm, left for a new job with Comerica earlier this summer. And venture partner Mark Mecham, who has reduced his role at the firm over the past 10 months, is evaluating opportunities with startups.

Mecham resigned his last board seat at a NWVA portfolio company -- Bellevue-based Teracloud -- last month. And he said that he no longer has any day-to-day responsibilities with the firm.

He said it made sense to further reduce his role given the firm's inability to raise about $100 million last year.

"You just don't need four or five general partners to manage a dozen companies, it kind of comes down to that," said Mecham, who joined the firm as a general partner in 2000 and handled new investments. "Frankly, the last thing you want to do is be part of group and not have anything to do and that's kind of where it was going."

The firm struggled to raise money because it did not have enough positive financial exits in its third fund, said Mecham. "To me, it is as simple as that," he said. Describing the current environment at NWVA as "harvest mode," Mecham added that there is still a chance they could raise more money if the current portfolio produces solid returns.

Simpson declined to say how much capital remained in the $133 million fund or disclose the financial performance of that fund or the two others. However, he said there is "more than ample reserves" to invest in the existing portfolio, which he says is in good shape.

The 47-year-old venture capitalist said there are no plans to sell the portfolio to a third party.

Northwest Venture Associates was founded by Simpson, a former investment banker at Dain Bosworth who in 1999 told the P-I that "the opportunity to invest in the region is immense.''

Times have certainly changed. Though Simpson achieved some success at the turn of the decade with early investments in startups such as Tegic, NetPodium and AdRelevance, he now thinks there are too many venture capitalists chasing too few high-quality deals.

When Simpson started raising his first fund in 1995, he said the Pacific Northwest was underserved when it came to venture capital money.

"My premise was dead on. The market was hot and as a result, within a couple of years, you saw like 40 venture funds," he said. "Right now, my same crystal ball is telling me: 'you know what? This market environment is way over saturated.' There is way too much money chasing the exact same things."

Venture capitalists invested $691 million in the state in the first half of the year, an investment pace only dwarfed by the dot com boom years at the turn of the decade.

One area which Simpson thinks is completely overheated is the Internet space, which he believes is littered with unproven business models that are destined to fail.

In his view, the only way to make money as a venture capitalist these days is to invest in companies and sectors that other investors aren't tracking. It also takes patience, seven to 15 years, he said. Even though NWVA won't have a new fund from which to invest, Simpson -- who says he has capital resources to tap when new deals arise -- believes that he will eventually be proven right with his latest investment thesis.

"Just because you can't raise a fund, doesn't mean it is a bad idea," said Simpson, referring to those non-tech companies that fly under the radar with $15 million to $50 million in revenue. "Does the world really need yet one more early-stage technology fund focusing on Web 2.0? No. But that is the mentality of many institutional investors."

He said the returns for many venture capital firms are "questionable," noting that it is time for the industry to change.

"Doing the same thing over and over again, may not be a good idea," he said. "That is the definition of insanity."

Posted by at September 7, 2007 12:01 a.m.
Categories: IPOs, Venture funds, Web 2.0

Comments

#50225

Posted by unregistered user at 9/7/07 7:21 a.m.

[ there is just too much money out there ]

There's too much money and they can't raise any? That's usually a compliant when there's not enough money.

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#50288

Posted by unregistered user at 9/7/07 11:09 a.m.

In the old days, rich people would set up foundations, universities, libraries, things like that. Today, they think investing in startups is a better way to put their money to good use. Just like everything else, it is time for the pendulum to swing back. May be they should look at the old way again.

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#50296

Posted by unregistered user at 9/7/07 11:24 a.m.

You first.

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#50304

Posted by unregistered user at 9/7/07 11:46 a.m.

You don't have to be the first. There are many ahead of you.

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#50322

Posted by unregistered user at 9/7/07 12:42 p.m.

If the returns were there, the money would be available. Bottom line.

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#50517

Posted by unregistered user at 9/8/07 8:21 a.m.

You people don't read very well. There is money, too much of it. He did not say he can't raise money, he said he is choosing not to.

Hint: an excess of investment capital does not increase the chances of profitability.

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#50663

Posted by unregistered user at 9/9/07 3:25 p.m.

I get a kick out of these folks that say the "model is broken" and they are getting out of the VC business. Let's be honest, conditions always change and they may not understand the new conditions, but to say the "model is broken" reflects a refusal to take any responsibility for the poor performance of their own fund. Sevin Rosen, while a venerable brand, was also a fund with extremely poor results over an extended period of time. Instead of saying, "we can't execute and deliver returns. They complained about the 'broken model' as why they are doing the right thing and leaving the industry.:

NWVA has a poor track record - period. The market worked correctly by not given them access to additional capital. This is no different than a VC refusing to put good money after bad into a start-up that hasn't produced.

What has happened over the last 10 years is that the Seattle VC industry has evolved. Seattle start-ups have a larger collection of firms to to choose from. Also, we're seeing way more Seattle start-ups skipping the local VCs completely and going straight down to the valley for financing.

If the model was so broken, why have we seen Frazier emerge as an early stage investor (they used to just do healthcare), Madrona, and Ignition have both raised new funds. Funds like Voyager (which struggled to raise a new fund) and MWVA which didn't produce have had to restructure their partnership or shut down.

A year ago, I heard the local VCs like Simpson complain about no exits, since then we've seen Isilon exit at a 1b+ IPO, we've seen numerous industry at 100m+ like FeedBurner, Tacoda (200m-400m), BlueLithium (300m), RightMedia (680m), aQuantive ($6b - seattle), XenSource ($500m - Ignition backed), Twango ($96m - seattle), Opsware ($1.6b), Sunny Gupta's company ($62m - seattle), VMWare ($1b+ IPO), etc,etc. We are likely to see companies like Facebook (which has $100m in revenue) and LinkedIn (also $100m in revenue) go public next year.

I know many Silicon Valley area VCs who are very interested in investing in Seattle area firms because they view the area as under-served. We've seen big time VCs like DFJ, Benchmark, KPCB, and Sequoia make numerous investments in Seattle area start-ups over the last year.

So pardon my skepticism when investors like Simpson complain about "me too" companies. Stop pointing the finger at the entrepreneurs who take the real risk. Why don't you look in the mirror and call it like it is - "you just weren't good enough." The ideas, the talent, and the capital (even if it is from California) are here in Seattle. It's actually good news that the market is culling our the 2nd tier non-performing VCs like this so that entrepreneurs have access to higher quality capital.

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#50769

Posted by unregistered user at 9/10/07 9:34 a.m.

well said...

this is blaming others for one's shortcomings....

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#51015

Posted by unregistered user at 9/11/07 9:08 a.m.

"Stop pointing the finger at the entrepreneurs who take the real risk. Why don't you look in the mirror and call it like it is - "you just weren't good enough."

Indeed. Simpson comes off as a whiny little twit who needs to be out on the soccer field counting the grass blades.

"The firm struggled to raise money because it did not have enough positive financial exits in its third fund,..."

In short, they sucked thus the 'model' must be broken...

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#51029

Posted by notahater at 9/11/07 9:49 a.m.

Seems like he's being straight up to me. The 1990s were a joke, anyone could have made money as a VC. At the top of the .com bubble all these people that made bank thought they could be VC's hung up shingles and there were and still are too many people chasing deals. With the market sour on IPOs there just isn't any real money to be made. The money was in developing real estate for a while but they missed that boat. We are just back to how things used to be for VCs, nothing has really changed.

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#51071

Posted by unregistered user at 9/11/07 12:09 p.m.

I think the model might have been broken for NWVA's apparent strategy of broad rather than deep. Maybe they guys would simply rather be on the other side of the table for a while. What do you suspect Simpson will do next? A) join another VC firm, B) Join a start up, C) work on his deck D) Advise companies trying to raise capital.

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#51275

Posted by unregistered user at 9/11/07 7:18 p.m.

This is Tom Simpson.

I have enjoyed reading all of the feedback. Overall, the comment are very valid and I appreciate the input. We were unsuccessful in fund raising and I take full responsibility. The only issue I will challenge is our track record, yet, there is no merit in judging the value of any VC portfolio until all the companies have exited. Stay tuned. I also know how hard entrepreneurs and founders work, and in no way did I intend to imply they were to blame for the current state of affairs. As for my future plans, I will continue to work closely with our existing companies, advise and personally invest in selected companies, consider launching my own start-up, and train for my fourth IronMan (I don't play soccer). Thanks again for your comments.

Tom

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#51770

Posted by unregistered user at 9/13/07 8:26 a.m.

Funny stuff. Particularly that hilarious piece of what we might term "event dropping". I'm sure we're all supposed to be impressed by the "4th". Perhaps if Simpson spent a bit more time working on making sound deals rather than biking around LW he wouldn't be making such a fretful declaration that simply comes across as an inability to admit suckage.

Sorry, Tom. Many industries have numerous entities that are in fierce competition with each other. The best still manage to succeed with great aplomb. Those who do not generally give interviews wherein they blame the way the game is played.

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#52032

Posted by unregistered user at 9/14/07 11:46 a.m.

While I do agree that there are lots of dollars chasing too few good deals, I don't think this means the "model is broken".

It simply means it's a seller's market right now (sellers being the sellers of equity).

An analogy: while home valuations are quite rich in the northwest (and have been for many years), very few would claim that the model for buying and selling homes is "broken". It simply means supply and demand balance out to high prices.

It's fine if a VC firm wants to pare back investments when it feels equity is too dear.

But this idea that the entire "model" of early stage investing is broken is a misuse of terms and smacks of passing the blame for poor investment choices.

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