Notes of Note from John F. Ince

Just attended the AlwaysOn Venture Capital Summit at the Rosewood Sand Hill yesterday… was struck by how the more things change they more they seem to stay the same.   Could this interview have been yesterday?

Q & A With Dick Kramlich, C0-Founder and General Partner, New Enterprise Associates

Dick Kramlich has over 30 years experience in Venture Capital.  He focuses on a broad range of technically oriented companies including present board memberships on Juniper Networks, Silicon Graphics, Zhone Technologies and many others.  Previous board memberships include 3Com,  Ascend Communications, Healtheon and Macromedia.  He was recently Chairman and President of the National Venture Capital  Association and was the recipient, in 2001, of their lifetime achievement award.  Prior to joining NEA, Dick was a general partner of Arthur Rock & Associates and Executive Vice President of Gardner & Press Moss.  He received an MBA from Harvard Business School and a BS from Northwestern University.

John Ince:  There’s been a lot of talk about all the “dry powder” out there.  How long will it take for this overhang to be invested?

Kramlich: I’d estimate that there is between $40 and $60 billion of investible money in the venture capital business today.  That is the so called dry powder, and you never take dry powder down to zero.  The funding requirements for most follow ons, if you add it all up, is somewhere around $7 billion per quarter.  And new investments will be at least that much.  That’s putting a twist on it for triaging and all that.  So there’s about a year worth of investment available now, without any sustained liquidity period.  If we don’t get a sustained liquidity period between now and a year from now, our business is going to be becalmed.  It will be dead in the water.  The chances of that happening are less than 50%.  I don’t think it’s going to happen, but it could happen.

John Ince:  What sort of returns will the venture funds be reporting to their LPs?

Kramlich: Even if we have some decent markets, and  I’m optimistic  about the markets in a cautious way,  the returns for the five year period, 1999-2004 are going to be very modest.  So the institutions that fund venture capital funds are going to have periods of modest returns if not losses.  Historically, it very rare that you have losses in the venture capital business, but so many investment were made at such high prices and there was so much concentration on the Internet, particularly B2B and B2C,  we’re going to see losses the likes of which we never seen before.  I’ve heard stories, but I think for the first time in the history of the venture capital business we’re going to have quite large sustained losses. Even those firms that are doing well during this period are going to have very modest gains.

John Ince: Which firms might be in trouble?

Kramlich: Some well known firms are going to have a hard time making their recent funds profitable.  Those firms that are dependent on  few limited partners, will have trouble.  The Sequoias and KPs won’t have any trouble raising additional funds, because although their heavily invested in the Internet, they also have a lot of good investments.  Some of the others are in jeopardy.

John Ince:  Do you see any signs of LPs reducing their allocations to venture funds yet?

Kramlich:  In order to qualify under the allocation rigors that institutional investors have, I think it’s going to be a long time, before we get our allocations back up.  But, we’ve got a really ironic situation taking place with allocations.  We had a 70% drop in the NASDAQ, until this recent rally.  But over the last 18 months, it’s off, say 50%.  But venture returns have not declined commensurately, so you’re over allocated in the venture pool.  The better funds will post modest gains, perhaps between 5-15%, so the end result is even with losses in the venture business, for a few years, institutions will be overallocated in venture capital.  This only catches up when you have a sustained rally in the stock market.

John Ince: So Einstein’s Theory of Relativity applies to the world of venture capital?

Kramlich: Yes.   Darwin and Shumpeter are also alive and well.  Darwin’s survival of the fittest has happened in telecom and the Internet.  The strong are surviving and the weak are dying.  And with Shumpeter,  you have the economics of creative destruction.  New technology destroys old technology.  Those two fundamentals are happening in a compressed time period.

John Ince: What is the longer term picture for the industry?

Kramlich: We’re looking at outcroppings of real problems in venture capital, but the underlying business is so ingrained in our culture now that I don’t think we’re looking at the demise of the industry.  We went through tulip mania.  There’s no question about it.  But there was a tulip business after that, although it wasn’t very exciting.   Just as we went crazy exaggerating on the John Ince, you can become irrational on the downside.

John Ince:  So is this a good time to be investing?

Kramlich:  As long as your expectations aren’t out of line, and your time frame is reasonable, I think this is the best time in the last 20 years to be an active player in this business.  The valuations are reasonable, and you have time to make well reasoned decisions.  We’re really in a good part of the cycle to make strategic investments.


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