William Sahlman teaches entrepreneurship at the Harvard Business School. He has co-authored several books on the subject, including “New Business Ventures and the Entrepreneur,” “Entrepreneurial Finance: A Casebook” and “The Entrepreneurial Venture.” Sahlman expects his new book, on the topic of “entrepreneurial wisdom,” to be published between spring and fall of 2007. For the record, Sahlman says he has no financial interest in Sevin Rosen.
Q: What do you think of Sevin Rosen?
A: Their assessment of the industry structure and the fact that it has to rationalize is absolutely correct. The amount of money in the industry fell precipitously in the late eighties and nineties and the rates of returns went up. People had more time to work with companies.
Q: So you agree with Steve Dow, that there’s too much capital chasing too few deals?
A: You have $100 trillion worth of equity chasing investments globally. Limited partners are going to get into the industry when they can instead of when they should. The median rate of return is likely to be zero for the foreseeable future. Yet the money stays in for the same reason that people buy lottery tickets.
I think their basic assessment is right. You see a lot more interesting teams and ideas these days than what you saw a couple of years ago, but not enough to overcome the tsunami of money.
I thought they were reasonably courageous, in the same way that the Charles River Ventures guys that gave back a large portion of their money were pretty courageous, too. By going to a smaller fund they were able to make decisions based not on the amount of money they had to put to work but on the quality of the deal.
Q: How do you think Sevin Rosen’s lackluster performance since 2000 affected the partners’ decision?
A. Everyone that had funds in that period stunk up the house except for the guys that ended up in Skype and YouTube. Even top-tier firms had crappy, crappy results, even for two consecutive funds.
Q: What about the firm’s adherence to tired sectors?
A: The telecommunications startup world went to hell and hasn’t returned. I can name some funds that lost 100% of their money. I look at the guys and I think there are some competent guys there. I think they have in mind the best interest of their limited partners because I think they’re competent investors.
You see a lot more interesting teams and ideas these days than what you saw a couple of years ago, but not enough to overcome the tsunami of money.
William Sahlman, Professor, Harvard Business School
My view is that they’re not out there doing yesterday’s deals: enterprise software or the next fast switch? Sure, but that’s not what they’re doing because those deals went away.
Q: Sevin Rosen did four recapitalization deals over the last two years. Are they throwing good money after bad?
A: I don’t know of anyone who has done a study of returns from recapitalizations, but we know there have been examples of spectacular returns from them.
Q: Like what?
A: The most famous example is Federal Express. It went bankrupt three times. Ned Heizer refused to participate in the third round. He made his money back and all the other guys got rich.
There are a few companies even as we speak that raised money at high valuations where they’ve gone through significant write downs and have a lot of good technology. YouPromise sold for $300 million. They had to wipe $90 million of preference stock to get there. If you invested in the down and dirty round, you did extremely well. Sevin Rosen has been pretty aggressive in writing stuff down. I don’t infer much from that.
Q: Do you think Sevin Rosen should have brought in new blood? There isn’t anyone there under 40.
A: My experience with the venture business is that age doesn’t matter, but intellectual curiosity does.
Ben Rosen and L.J. Sevin loved helping small companies. The firm’s first two investments went out of business. The second two were called Lotus and Compaq. My sense is that there are people who love the business and have enthusiasm for it. Anybody who comes to work for the money you shouldn’t give money too. Or call them a private equity firm instead of a venture firm.
Q: So why didn’t they evolve?
A: Every successful firm has evolved in certain ways. It’s easy to say they’re getting out of the business because they’re incompetent or that they’re not getting paid, but I take it with a huge grain of salt.