Earlier this month, I spent a morning at the offices of venture capital firm DCM in Palo Alto chatting with co-founder Dixon Doll and general partner Peter Moran. Though it was my first time meeting them in person, I had spoken with Doll previously in his role as chairman of the National Venture Capital Association.
In that capacity, Doll had overseen the creation of NVCA’s “4 Pillar Plan” to restore liquidity to the capital markets. Despite my initial skepticism, I found a lot to like in the plan. I particularly appreciated that the tone of the plan was not about blaming others (i.e., Sarbanes-Oxley), but explored the complex trends that had undermined the IPO markets and proposed a number of positive steps.
There was no agenda to this follow-up meeting, other to meet and get Doll’s and Moran’s thoughts on the state of the venture capital industry. Doll, in particular, has been active in the valley about three decades. And I came away with a lot of interesting thoughts from both men. Here are few topics that have stuck with me since our chat:
Doll believes a number of factors (less volatility, strong demand for IPOs, better earnings) are lining up this year to make 2010 a decent year for IPOs: “It will set the stage for a much more vibrant IPO market in 2010. Tech has had a pretty good run this year.”
He’s also finding managers of smaller mutual funds expressing interest in venture-backed companies going public. And DCM’s portfolio companies are reporting that customers are starting to loosen their IT spending budgets again.
Moran works with semiconductor companies and content companies. He’s been making the case that semiconductor start-ups need to take a second look at the IPO market. The attitude has been that such exits were closed for start-ups in this industry. But Moran thinks the best companies have a good shot at an IPO.
Both men expressed disappointment that there’s not been more attention to the innovation agenda in Washington, D.C., either from the White House or Congress. They’d like to see more aggressive approaches to addressing taxation and regulatory issues. “We’re continuing to pound away in D.C.,” Doll said. “But we haven’t really seen anyone step up and show any leadership.”
Moran said some stimulus funds had benefited start-ups, but much more of it went to old economy companies like the auto industry.
One of the more provocative points that Doll made: He’d like to see an aggressive shake out of venture-backed start-ups. “There’s still way too many small, venture-backed companies out there,” Doll said. “We need to shake that down.”
His reasoning: A lot of VC firms raised funds in the dot-com boom and were still using that to back companies through 2004-5. On average, there have been a 1,000 venture backed companies each year, he said. Given the relatively small number of exits over the past few years, way too many of these companies are lingering, sucking up venture money, VC’s attention, and talent serving products that have no real future. Doll wants his colleagues to be more aggressive about selling or winding down these zombies, or “living dead,” as he called them.
Why do VCs let these companies linger? Moran said: “It’s hard to shut them down. That’s when an investor has to admit they have a loss.”