Don Dodge say VCs invest $40 billion with only $18bn in exit: some addional data points

Don Dodge has written an excellent piece Venture Capitalists and Angels invest $40 Billion per year but see only $18B in exits that Jeff Nolan and Jason Wood have commented on(hat tip to ). The core thesis of his post is that "exits have averaged $18B over the past 6 years while investments have averaged about $40B over the same time period. "

He further adds-

This can't go on forever. Or, maybe it can. Gamblers lose billions of dollars every year in Las Vegas...and have been happy to do so for over 50 years. VCs and Angels are big time gamblers and they love the game. One winner erases all the losers in their mind. I completely understand that because I think the same way.

Now as much as I love Black Jack as the next guy, I think these numbers may not reveal the full truth. The total value of all IPO exits for VCs is reported as $28.4 billion. I suspect that this figure is based on valuation at the time of the IPO. Let me prove by contradiction. (Okay, proof is a strong term, let me illustrate by way of an example.)

Google: Now here are some numbers reported to SEC (accoding to Venture Beat).

According to Google’s filings with the SEC, Sequoia Capital owns 23,893,800 shares in Google, now worth $4.42 billion on paper, and Kleiner Perkins has 21,043,711 shares, worth $3.89 billion on paper.

Now this was more than a year ago. Since then the value of the Google shares has gone up further, and the combined stake for the two VC firms in Google today would be $20,221,879,950 (at $450 a share, current prices). That is over $20 billion.

Yes, this argument is using the best case example. But I would surmise (and bet) that the same is true for other big exits. Salesforce.com investors for example 'exited' the company by way of an IPO at $11 i.e., less than $1 billion (market cap). Today the stake is worth 5 times the amount.

In that sense, an IPO exit is much more preferable than M&A because it allows further appreciation even after the exit.

At the same time, I do agree that the market value represented by the IPO price is an accurate measure. The fact that some shares appreicate in value after the IPO is supposedly reflected in the share prices.

What do you think? Are these calculations wrong? Or am I missing something very basic here?

Time for a new VC pitch: This is not a Pipe!

"This is not a Pipe"

The modern version of this painting is "This is not a computer" by Apple.

"This is not a Computer"

For far too long, budding entrepreneurs have been asked to explain their ideas in the context and vocabulary of existing success stories- "YouTube is FlickR for videos", "RFID is barcodes without line of sight", etc. Even though I am the first to admit that it aids in communicating the idea to a novice, but it also hampers original thinking and ideas. You just have to look to Enterprise 2.0 (Web2.0 for the Enterprise) to see how the simplicity of the communication does not always map to a real product or service.

EBay was not simply Sotheby's on the internet. And Yahoo! was not just Yellow Pages on the internet. In order to create revolutionary new products, you sometimes have to think from scratch and not be limited by existing vocabulary or memes.

Several technology giants today are struggling with slowing earnings and revenue growth- they can all do well to learn the lessons of iPod (and Motorola RazR):

1. Invest in bold new ideas: Releasing yet another incrementally improved version of an OS is not breakthrough innovation.
2. Be willing to let go what it means to be a "computer company": IBM learned this the hard way in 1980s. You want to be the innovation company, the ideas company, the good customer service company and not necessarily be tied down to a particular product or manner of delivery.
3. Small teams: Only small teams with a passionate few people can come up with new products and services. As a rule of thumb, any team that cannot fit in your corner office is too big.
4. Big companies can innovate: It is easier as you grow to be a large company with billions of dollars in revenue to fall into the Innovator's Dilemma- what is right for the most profitable businesses can lead to the wrong long term consequences. Adopt one of many solutions to this well studied problem- new DNA, acquisitions, intrapreneurship, spin-in structures- to foster innovation.

What do you think? Are the large companies doomed to follow rather than lead? Have you or anyone you know tried to innovate within a large company?

Update: Sharad has posted an excellent response to this on his blog at Lack of Innovation... and suggested two alternate paths to innovation.

I believe that a big company can foster innovation one of two ways. It can either emulate an entrepreneurial company much like what Apple has done in recent years. Or it can leverage its size to follow the Toyota and Honda’s Kaizen method of breakthrough innovation. Right now, unfortunately, most IT companies are doing neither.

How do you see it?