Ross Levinsohn: From Big Rounds to Down Rounds
Posted on May 1, 2008
Filed Under VC Insanity |
Back in December, Ross Levinsohn was quoted by PaidContent as saying:
Shopping: When I asked if they’re running into companies eager to sell now in case things turn sour, Levinsohn said it was just the opposite. “I’m actually amazed by it. A year ago … there was more desperation to sell.” The Facebook platform initiative and, to some extent, OpenSocial, turned that around, adding distribution to companies that once were only features.” They now have tens of millions of users and are raising money at huge multiples—hundreds of millions of dollars—and they’ll get it.”
I noted that such a statement was indicative of Bubble 2.0 and pointed out:
Although Levinsohn’s statement only reflects the perspective of one person (albeit an extremely well-connected one), if the reality is indeed that many Internet startups were more eager to sell last year and now think that they’re worth hundreds of millions of dollars instead, there can be no doubt that Bubble 2.0 exists and is getting more inflated.
How quickly things can change.
At the deals panel at the EconSM conference, Levinsohn, who now runs Velocity Interactive Group, , making the enlightened observation that “We’re coming to the end of the cycle.”
According to PaidContent:
But that’s not because things are dying down, as Levinsohn claims to be seeing more innovation than ever before. It’s just that this innovation is accompanied by compression. He added that his firm is telling companies to preserve cash and look out for good buyout opportunities: “You’re going to see some big names have to take down rounds.”
It’s interesting that in just a matter of months, the ultra-well-connected Ross Levinsohn is discussing polar opposites and I think it’s unfair to make the argument that nobody could have predicted the change in the economic landscape. While the economy has soured significantly in the past quarter, the writing was on the wall back in December when Levinsohn made his statement and the notion that things like the Facebook platform and OpenSocial could justify insanity in the face of a deteriorating economy was nothing less than, well, insane.
After all, I reflected on recession just a couple of weeks after, noting that “slowed consumer spending, whether part of an official recession or not, will impact lots of businesses. And this includes consumer Internet companies.”
Of course, many in Silicon Valley proclaimed “This is not our bubble!” thinking that they were immune from one of the most serious economic crises in recent history. As they’ve slowly learned that it is their bubble, I have joked “Silicon Valley’s economy is part of an ‘open’ platform called the United States economy - it’s not a ‘walled garden.’”
But I digress.
Levinsohn’s divergent comments highlight extremely well the inanity of most of the statements that VCs and other industry players make. In other words, for all of their access to information and supposed knowledge, most have less common sense than the layman who would tell you that you would have to be stupid to value a company that has reportedly generated around $1 million in revenues since 2005 at $200 million, especially knowing that nobody expressed interest in buying it for $250 million.
Of course, the semi-initiated know that only a handful of venture capital firms have proven an ability to consistently pick big winners and that most VCs are little more than McKinsey types who know everything about building a business in theory but couldn’t run a local pizza joint if you gave them a manual. They rely primarily on the to make money and they only do so when there’s an “uptrend.” In other words, they’re no more intelligent or talented than an orangutan.
Unfortunately, there are entrepreneurs out there who listen to dumb money investors masquerading as smart money investors and if they didn’t sell out or close their big rounds at the “huge multiples,” they just might be fucked now that they’re just getting the news that “we’re coming to the end of the cycle.”
Note to entrepreneurs: when Bubble 3.0 rolls around, please remember to sell when your friendly neighborhood venture capitalist tells you that your tens of millions of users are worth hundreds of millions of dollars despite the fact that you haven’t made enough money to stop suckling on a VC teat. A down round or the deadpool likely isn’t far off.
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