Neil Sequeira of General Catalyst; Bob Abbott of Norwest Venture Partners; Ray Bradford of KPCB; and Bill Bryant of Draper Fisher Jurvetson at TechNW.

Is the venture capital model broken? We’ve heard that question debated before, and discussed at length here on GeekWire.

And the discussion popped up again Wednesday as longtime Seattle angel and venture capitalist Bill Bryant asked a group of VCs at the TechNW conference in Seattle what’s wrong with an industry where returns “rival T-bills” and an estimated 75 percent of portfolio companies fail.

Ouch.

Bob Abbott, a general partner at Norwest Venture Partners, a Silicon Valley firm with $3.7 billion under management, noted that it has been a “tough decade” for venture capital firms despite the fact that a number of important startups continue to thrive.

“One of the challenges that we had at the beginning of the millennia was that there is too much money in the system, and I think that’s reconciling itself over time. It takes a long time … for the industry to right-size itself, and we are still going through that. When you have a lot of capital in system, it drive prices up; it funds a lot of competitors; and that hurts everybody in the end — whether it’s entrepreneurs or VC’s. I think we are starting to come out of that cycle, if you will. These are cycles, and they take time to get through, but I am still very optimistic that venture will be funding the next engines of growth in the economy and will continue. Yes, there are going to be failures. There are always failures, but people learn from it and they get better and so I don’t think the system is broken. It is definitely tough. It’s not easy. But I think that you will still see great returns, and companies being formed and created.”

Compared to 10 years ago, Abbott said that it is so easy to start a new software or Internet company, requiring minimal amounts of capital. That led Bryant, who moderated the panel, to ask if venture capital is really needed in this era.

Neil Sequeira and Bob Abbott at TechNW

Of course, the VCs aren’t going to talk themselves out of a job. Neil Sequeira, managing director at General Catalyst Partners, noted that the landscape has changed with a huge group of angel investors who are now bankrolling startups.

“We actually think that’s a great thing for the market. We try to get to know them earlier. We try to get to know those angels. We try to get to know the companies that are getting funded,” said Sequeira. “And it is a different dynamic where you sometimes go in super early, and spend a lot of hard work to build these companies…. I do think there’s still a place for venture capital, and I think it is a great time to be an entrepreneur because you find different sources of capital, at an earlier stage.”

Ray Bradford of Kleiner Perkins Caufield & Byers added that money is increasingly becoming a commodity, noting that VCs need to put on the table additional services such as recruiting and business development.

Nonetheless, new tech accelerators such as TechStars and Y Combinator are changing the venture capital dynamic. However, the panelists agreed that they are a good thing, largely because they are helping young and smart entrepreneurs start new businesses. Same goes for Kickstarter, which the panelists agreed was doing  innovative stuff in terms of helping new ventures get off the ground.

Previous coverage from TechNWGame experts debate: Is Microsoft Kinect a passing fad or here to stay?Zillow CEO Spencer Rascoff sounds off on the JOBS Act, calls it a ‘step backwards’… Zillow CEO Spencer Rascoff: Startups that try to disrupt real estate commissions are doomed to failLive from TechNW: The future of e-commerce

GeekWire staff reporter Taylor Soper contributed to this report.

Comments

  • Ray Burt

    Don’t feel too bad for them…people who run VC funds live in very nice houses and drive very nice cars and eat in very nice restaurants Investors in VC funds should know that, before committing any dollars to VC funds that end up with such dismal results.

  • guest

    VCs should be paid like the folks they fund. Super low salaries. Everything based on exits. Instead, they make gobs of money off of management fees while telling their portfolio companies about the value of frugality, and trying to pretend they’re risk takers just like real entrepreneurs.

    It’s not even close. Not by a long shot.
    If those fees are OK and don’t skew their incentives, then they should pay the entrepreneurs they fund comparable amounts.
    Otherwise, they should suck it up like the rest of us. Then, they might have the right to comment about how great risk taking and entrepreneurship really is.

  • http://twitter.com/fijiaaron Aaron Evans

    The yield on a 5 year treasury bond is 0.62%.
    http://ycharts.com/indicators/5_year_treasury_rate

    There a couple things to note here.
    1 – That’s almost a record low versus the long term average of 6.36%.
    2 – Inflation is never lower than 2%, with a long term average of 4%, and is higher now. That means t-bills are less than free when you take into account inflation.

    This means we can draw a couple conclusions:
    1 – No one is buying treasuries (that’s not true, the Federal Reserve is)
    2 – Inflation is expected to increase drastically.

    We just started our third round of QE (essentially printing money.) The federal debt (another form of printing money) has doubled in 5 years.

    Treasuries are considered a hedge against inflation.

    All rates should be adjusted against forecast inflation, so it’s not surprising that Venture Capital returns are low.

    But to be lower than the “sure thing” that is treasury bills are supposed to be — that means you’re better off not investing in VC. Why take the risk?

    Which seems about right.

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