A VC Talks About Tech in the Age of Gloom

A venture capitalist reveals what sector remains hot even in this pessimistic period and describes the lessons tech firms have learned over the last boom and bust cycle.
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As venture capitalist Ed Sim takes my call, he glances quickly at the stock market. The Dow’s dizzying whipsaw motions and the accompanying deluge of dark headlines is unnerving investors small and large – including Sim.

“It’s frightening out there,” he says, observing only half-jokingly that the sky appears to be falling.

But Sim reassures himself with the thought that “we’ve seen this movie before.” Certainly Sim himself has. A VC since 1996, he participated in that horror flick known as the dotcom boom and bust. The New York-based Sim, a Harvard grad, is managing partner of Dawntreader Ventures, with $290 million under management. He sits on the board of a variety of Internet companies, and funds the likes of Greenplum, a database software firm. He blogs at BeyondVC.

As Sim sees it, the tech world learned a hard lesson from the dotcom crash, a lesson that may now help it survive today’s pessimistic gloom.

In the 90s, tech start-ups were built on what he calls the ‘Field of Dreams’ model. Yet as they learned after investing mountains of cash on sandcastle business plans, “build it and they will come” only works within the reality of a Hollywood script.

In contrast, today’s tech start-ups are being forged with something resembling clear-eyed pragmatism. The operative mode has been bootstrapping, as they’ve minimized costs by using open source and commodity clusters. “It’s more about building stuff, getting product ready and not spending a lot of money,” Sim says.

Ed Sim, Dawntreader Ventures
Ed Sim
Instead of Field of Dreams, the current model is “release early, release often,” he notes.

Not that he’s become a starry-eyed optimist. If the looming downturn squeezes Internet advertising budgets, he sees a negative impact on start-ups. (And yes, he’s still interested in ad-based start-ups, a Web model that some turned away from after the late ‘90s.) Nor is there safety in large enterprise budgets. “On the negative side you saw SAP come out with [bad] numbers, but look, they’re moving billions and billions of dollars of revenue – of course they’re impacted. Some of these deals are based on financing.”

His gloom, however, is tempered. “I’m not going to say that companies are going to survive better than they did last time, but people are doing it more judiciously, there are more proof points available.”

A key difference between the 90s and today: tech firms are now looking ahead, eager to make adjustments as needed. In the dotcom frenzy, ill-managed start-ups kept rushing toward the cliff like lemmings, heedless of burn rates, hungry to be first in their sector. And profit be dammed.

What a difference a decade makes. “If you talk to veterans in the space, whether they be entrepreneurs, venture capitalists or investors, having been through the movie before, when you say, ‘Hey, things are really bad this time and even worse than before, you need to course correct’, I think people really pay attention,” Sim says.

As an example of a start-up model that’s adept at course correction, he cites ad-supported online businesses that use Google AdSense (or other ad networks) instead of hiring sales reps to call big-bucks advertisers. He calls this a “frictionless” model, and notes that its low fixed costs allow an owner to rapidly shift strategy as business conditions require.

“The models that are going to be hurting a little bit more are the ones that are going to be reliant on heavy, large direct sales, going after the big elephants,” he says, referring to high profile advertisers. Naturally, he concedes that this big game offers the most lucrative ad revenue. However, “When you go after the bigger dollars, you better have a bigger/better/faster/cheaper kind of approach. It’s got to be much better than what else is out there.”

It’s the issue of burn rate – the rate at which firms devour dollars while waiting for profit – that concerns Sim highly. For today’s venture capitalist, a start-up with a rapid burn rate is as likely to get funded as the unwashed slob is to get a date with the prom queen.

“There are pockets of great things in every space, but one thing that people are very leery of is huge, huge burn rates.” (Don’t call us, we’ll call you…)

So amid the gathering gloom, what tech sector still excites venture investors?

A particularly hot sector is cloud computing. Cloud computing is very much the buzzword du jour, Sim says. It’s emerging so rapidly that the term ‘cloud’ now has a dazzling array of definitions, used in a blizzard of techno-speak. But in essence it refers to a company purchasing computing power from a remote provider over the Internet (or “cloud”) instead of relying on in-house servers.


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Tags: open source, cloud computing, software, SAP, advertising


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