Hitting For Average Vs. Swinging For Fences

another good article from the WSJ - ya gotta love the honesty of our friends at AlphaTech.

March 2, 2009, 11:32 PM EST
Hitting For Average Vs. Swinging For Fences --> -->

By Scott Austin
Baseball enthusiasts often disagree about who’s the more valuable hitter: the slugger who often strikes out but occasionally connects with the big home run or the light-hitting speedster who racks up singles and doubles.

An onstage chat about investment returns at Monday’s Demo 09 conference sparked an analogous disagreement among venture capitalists.

Deep into the talk, which was titled “Venture Capital in the Post Recession” and streamed live on Demo.com, David Hornik, a partner at August Capital, explained that it’s the “wild success stories” that have always driven the venture capital business. Those investors that manage to make the home-run investments “will always drive great returns for their investors,” said Hornik, whose early-stage firm manages more than $1.3 billion in capital.

Christine Herron, a principal at seed-stage investor First Round Capital, which typically invests just a few hundred thousand dollars per investment, politely bit back. “That’s taking a very big-fund mentality,” she said. “For seed stage investors or angel funds that manage $100 million, you can keep hitting a double, double, double, and still have a great fund.” Herron said that a fund she worked at in the early 1990s, Geocapital Partners, was able to yield a respectable 4x to 5x return by stringing together several smaller hits. “We didn’t have the expectations of putting down a check worth $20 million to $30 million.”

Another seed-stage investor, Bryce T. Roberts of O’Reilly AlphaTech Ventures, believes the venture industry needs to scale back expectations. “I think that’s one of the things that’s come out of this downturn is recasting what success looked like,” he said. “When I first got into venture capital in 2001, it was all about trying to build the billion-dollar business….I’m all about swinging for the fences, but that’s the spotlight being cast on the venture industry.

“How many multibillion dollar business have been created in the last seven to 10 years? How sustainable is that as a model versus taking smaller amounts of capital and preserving optionality, and taking a slower path to growth rather taking a ton of dilution and multiple rounds of financings? That’s going to be a really attractive and viable model for entrepreneurs going forward.”

Earlier in the discussion, Roberts said the size of seed rounds are growing because in this environment it may take longer, up to 24 months, before venture capital investors swoop in. “We used to be able to invest $100,000 to kick a ball out for 9 to 12 months, now we’re looking at $1 million to $2 million for a seed round.”