Earlier this week, former VC Bill Stensrud published a piece at his blog about why venture capital as we know it is doomed.
His argument has nothing to do with “the economy of other transitory exogenous factors” to which other doomsayers often point. Stensrud says the problem is much more fundamental. Specifically, he argues that that last truly life-changing innovation was the invention of the transistor in the 1950s (it was “the meteor hitting the earth”), and that pretty much everything else that has followed since — the integrated circuit, the PC, wireless telephony and the Internet — have been opportunities born of that invention.
Big deal, right? Except Stensrud believes major innovation happens not in gradual, continuous streams but in rapid periods followed by long, stagnant periods — and that we saw the end of a 50-year-period of “rapid” innovation in 2000.
Because it’s an extreme view, and because Stensrud is no longer in the industry (the La Jolla, Calif., firm where he spent 10 years, Enterprise Partners, raised its last fund in 2001), I asked Stensrud to elucidate this afternoon. The conversation was more interesting than I’d expected.
You say in your essay that institutional VC was incredibly helpful and profitable during the period of rapid innovation we experienced from the ‘50s through 2000, but suggest that it’s now redundant. But what about the next wave? And are you linking every innovation since the transistor to the transistor?
I’m not arguing that innovation won’t happen again, but innovation deriving from transistor’s appearance has played itself out. Everything that’s technical in our lives has been a sub-innovation.
But in your blog post, you lump in clean tech, too. Isn’t that comparing apples and oranges?
Between 2007 and 2008, $14 billion was invested in clean tech and my question is: what is the new tool? What’s the technology innovation? Where’s the equivalent of the transistor? Is there anything that makes it possible for people to create fundamentally new breakthroughs in clean tech? My contention is that there isn’t.
Harnessing solar power doesn’t count?
The issue isn’t whether these things will or should be built. The question I’m asking is what makes a startup opportunity versus an opportunity for a big company. I don’t see any fundamental breakthrough that makes a startup better equipped than Exxon or Toyota to make biofuels or clean technologies.
The same is true of electric cars, which, as a venture investment, is just brain dead. If you look at the economics of starting a car company, you’re talking about billions of dollars. That’s not a startup opportunity. More to the point, an electric car is a feature of a car. There’s no new tool that makes a startup uniquely capable of making an electronic car. Why can’t Toyota do it? Not only can they, but if there’s a market, they will.
But based on your reasoning, Google wouldn’t exist today. Because a bigger company can do something doesn’t mean it will, or that it will do it as well as an upstart.
The reason they were able to create Google was that they had a vision of what the Internet would become and how to use that new tool in a radically different way. There was plenty of Internet search before them, but Google invented the marriage of Internet search and advertising.
You’ve said the Internet was a sub-innovation of the transistor and that the trickle-down effect ended around 2000.
Roughly. A new tool, in this case the Internet, creates so many opportunities for new businesses that smart people with vision can create major new businesses for several years after that tool comes out. Eventually the tool has been looked at by so many people from so many different perspectives that the chances of coming up with something really different decline to effectively zero. There is still some life left in the Internet, but none, that I can see, in the electric motor.
So startups shouldn’t bother to compete with incumbents?
If startups are forcing Exxon and Royal Dutch Shell into clean tech, for example, how does that benefit the VC? Does a guy who’s investing in a startup want to motivate the big guys to take its market away or does he want a commercially viable product?
What about VCs funding drug therapies? Are you of a mind that institutionalized venture capital for healthcare doesn’t make sense anymore, either?
Do you know how much money has been made in the healthcare VC industry? None. It’s produced a lot of healthcare wins. But they’ve dug a lot of deep holes in the ground as well. If you look at the venture capital — I’m talking total dollars invested in technology from 1950 to 2000 — that investment over the entire industry produced about an 18 percent ROI, which is enormous. If you look at the same investments over that period in life sciences it produced zero ROI. That’s not to say that some funds weren’t successful, because they were, or that some investments weren’t huge wins, because they were. But overall, it’s not been a successful industry.
I’m sure plenty of people will agree with your theory. Others will say this is all sour grapes because Enterprise Ventures didn’t raise a seventh fund. What’s your response?
Look, I spent most of my career as an entrepreneur. I co-founded StrataCom (acquired for $4 billion by Cisco in 1996), I was president of Primary Access (sold for $170 million in 3Com stock in 1995), and I was part of the team that did the leveraged buyout of Paradyne from Lucent.
I went into VC in 1997 after I thought my entrepreneurial career had run its course. But I left it because it was other people’s money, and if I was going to invest it, I needed to believe I knew where to do that, and I didn’t.
You left in 2006. Was the firm already in the process of trying to raise a new fund at that point?
They were investigating a new fund. I didn’t want to be party to it, though. I’ve made more than enough money in my career. I didn’t need the venture business to pay my bills and I wasn’t going to spend the last chapter of my career doing something I didn’t believe in. I have a little bit of pride yet.
Today, you’re CEO a site called InstantEncore. Tell us about it.
It’s a very vertically focused Facebook that allows classical musicians and artists and presenters to use community tools to build their audiences and donations.
I take it you aren’t doing it for the money.
No, I’m a passionate lover of classical music. Making money would be nice but it’s not why I’m doing it. It’s really a family affair. My son is involved, and my nephew. There are just five employees. We’re keeping down our burn. [Laughs.]