VC Model (Still) Not Broken

Citrix yesterday made waves by agreeing to buy virtualization software company XenSource for $500 million in stock and cash (60/40 split). XenSource had previously raised around $38 million in VC funding from Kleiner Perkins, Accel Partners, New Enterprise Associates and… Sevin Rosen Funds.

That would be the same Sevin Rosen Funds that last October suspended fundraising after declaring the VC model to be “broken.” For the uninitiated, see here and here.

So has Sevin Rosen’s own success proved its argument wrong? Nope, because its argument was wrong to start with. XenSource is just a case in point. Hold on one moment, a fictional reader has his hand raised. Go ahead…

“Ummm, Dan. Wasn’t it just two weeks ago that you made a big deal about how the majority of VC funds raised post-bubble are underwater, and how that indicates a lack of VC market sustainability?”

Yes, but there is a difference between a broken VC model and broken VC firms. The problem isn’t that too many firms have failed by using the VC model, but rather that too many have failed after abandoning it. As I wrote last year:

Even [Sevin Rosen’s Steve] Dow acknowledges that some of Sevin Rosen’s best hits lately have come from companies that it seeded, not from ones it jumped into bed with at Series B or Series C. Too many firms have spent the past few years rushing downstream in the name of risk aversion, without realizing that the water is actually safer up above. These shops might get shaken out when all is said and done, but that’s more on them than on the VC model itself (which they abandoned).

XenSource is one of those companies that Sevin Rosen seeded. In fact, it incubated XenSource in its offices. I’m obviously not saying that every firm that continues to focus on early-stage investing will succeed – or vice versa – but it’s all about improving your chances.

So congrats Sevin Rosen. Revel is being wrong. You and your fellow XenSource investors have 500 million reasons to do so.

*** I spoke yesterday with Sevin Rosen partner Nick Sturiale about the XenSource deal, but was mostly unable to pull him into the “VC model is broken” discussion. Quite the laser-focus on XenSource. So I went in a different direction: Does he wish that Citrix had approached XenSource a month or so later, so that the deal terms would not have been signed before XenSource competitor VMWare had what is arguably the best tech IPO since Google?

He said that he can’t let himself think like that, or else it would cause too many “gray hairs.” I hope he doesn’t get too upset when looking in the mirror this morning, because his denials were unconvincing (which is good, because their validity would make him some sort of cyborg).

It’s a great win that was certainly aided by VMWare buzz, but what if… Well, what if?