Tom
Stephen E Philion wrote:
> NYT
> December 11, 1999
>
> Is There Too Much Venture Capital?
>
> By CHARLES FERGUSON
>
> I subscribe to VentureWire, an e-mail newsletter that summarizes
> new venture capital investments in Internet companies. An average
> issue lists about 20 deals, usually adding up to between $100
> million and $200 million. What's striking is that VentureWire comes
> daily -- and yet doesn't catch everything. Driven largely by
> optimism about the Internet, investment in American technology
> start-ups will probably reach approximately $50 billion for this
> year -- about 10 times more than in 1994.
>
> This eagerness to invest in the latest start-up is, of course,
> another aspect of the same rush of capital that we are seeing when
> high-technology companies go public. On Thursday, the stock of VA
> Linux Systems had the biggest first-day gain for any initial public
> offering in history.
>
> This company, which sells computers that run the Linux operating
> system, faces serious competitors like I.B.M. and Dell, is losing
> money and will not turn a profit for the foreseeable future. Yet it
> was valued at almost $10 billion by the end of the day -- a gain of
> 733 percent.
>
> But high-technology start-ups are not just stocks; They are also
> businesses, and they have to operate. The giddiness about stock
> prices is obscuring the real needs of companies.
>
> It didn't used to be this way -- in fact, we used to have the
> opposite problem. Until very recently, the venture capital industry
> was a small club, verging on a cartel, and the technology sector
> was for geeks in California, period. Money was tight, particularly
> during the technology sector recession in the early 1990's.
>
> In 1994, I spent five brutal months raising $4 million for my first
> company, an early Internet software start-up. At the time, there
> were maybe a thousand Web sites in the world.
>
> But since the onset of the commercial Internet revolution in 1995,
> money has flooded into the Internet, with the size of the venture
> capital industry roughly doubling every year. A very real
> revolution -- the growth of the Internet -- is being accompanied,
> and sometimes damaged, by an epidemic of speculation.
>
> Fund-raising has become a buyer's market. Venture capitalists now
> must compete for deals, despite their vastly increased funds and
> the large number of Internet companies being started.
>
> In many ways, this is good. It is now much easier for entrepeneurs
> to raise money. I recently founded my second Internet start-up.
> This time, I raised over $3 million in the first month.
>
> The Internet has also made business life a lot fairer. You don't
> have to stay in a big, bureaucratic company anymore; you can join a
> start-up. You can bypass middlemen and sell directly to the global
> market. And without a doubt, the Internet wouldn't have come so far
> so fast if venture funding still behaved as it did a decade ago.
>
> But the fact that virtually any idea -- no matter how dubious --
> can obtain money, and that so much money is available, is also
> causing problems. Competition among Internet companies is
> increasingly a financial arms race. They must raise huge war
> chests, give away their products, advertise on television, and pay
> insanely high salaries -- simply because their competitors do.
>
> The glut of money also has companies -- and the industry as a whole
> -- growing insanely fast, leading to labor shortages everywhere --
> of not only engineers and managers, but graphic designers,
> accountants, headhunters, telephone system installers.
>
> Fortune seekers, many of them unqualified, flood to the Internet --
> both to start companies and to work in them. This leads to sloppy
> work and some fairly sleazy behavior.
>
> In some respects, the rush and confusion are natural costs of
> moving forward as a major new technology becomes widely available.
>
> Relative to the benefits that the Internet brings, these problems
> are comparatively minor. But the inherent dangers of a speculative
> environment will eventually hurt many naive investors -- and
> perhaps, more importantly, they also make life more difficult for
> serious entrepeneurs.
>
> Charles Ferguson is the author of "High Stakes, No Prisoners: A
> Winner's Tale of the Internet Wars."
> _________________________________________________________________
>
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