No pain, no change

Sevin Rosen Funds is still very much the topic of debate. You’ll recall that it postponed raising its latest fund, telling LPs that there were some “fundamental structural challenges” in the venture business that have prompted it to try to find a new model that will produce better returns.

Two of this issue’s guest columns touch on the topic. Also, over at peHUB, Thomson Financial’s new private equity news and community site, some participants have praised SRF while others have criticized it.

I was probably too flippant about the issue last month. I actually agree with many of the points in Sevin Rosen’s letter. But, as I have said, the problems the firm identified didn’t appear overnight. They have been with us for some time.

Sevin Rosen is absolutely correct that there is too much money in the venture business. But that’s not the fault of venture capitalists. Limited partners are to blame. And I don’t see their behavior changing anytime soon—if ever.

It’s like Bill Gates being addicted to video poker. He could lose at it for the rest of his life and would never be any worse off because the losses are so small compared to his fortune. Likewise, many deep-pocketed LPs are getting paltry returns or are losing money on VC investments, but they’re still turning fat profits on investments in buyout funds and other kinds of private equity. In VC terminology, LPs haven’t reached a pain point that will force them to be more selective about how much money they invest in VC or the quality of venture investors that they back. I’m not certain they will ever reach that point—like Gates could continue losing at video poker into perpetuity.

So VCs are in the driver’s seat. With no shortage of capital, they can continue to raise too much money. The only thing that will get them to change their ways is if they decide they’d rather raise smaller funds—and take smaller fees and work harder. It looks like that’s the direction SRF plans to go, but I don’t see many others following its lead.