Too much money in Silicon Valley?
Accel Partners, a well-known Silicon Valley venture firm, has finished raising a new $400 million fund. On its face, that's good news for local start-ups.
There's been a lot of gossip around this particular firm, though. Not merely because it pushed its start-ups to aggressively outsource to Asia, which we reported on here. Word is, Accel, led by Jim Breyer (picture at left) managed to again negotiate a whopping 30 percent "carry," which refers to the proportion of profits the firm's partners take for themselves after giving the rest back to their investors. The industry norm is more like 25 percent. And that, despite public records showing Accel's last fund, raised in 2000, isn't doing that great.
It has a -23 percent internal rate of return, and is thus listed in the forth, or lowest, quartile when measured against its venture capital peers -- something VentureWire reports today (sub req, so sorry we don't have a link to the story). We'll assume for now that VentureWire got all these details right.
What does that say? Accel is only four years into that 2000 fund's life-cycle, and it might yet produce some winners -- it often takes years for freshly minted start-ups to generate profits even if they are successful. So we'll have to withhold final judgment. Accel isn't saying much, even on background, citing fear of transgressing SEC guidelines. Accel is still raising a separate side-fund, set aside for wealthy individuals, and is legally restrained from talking until the fund closes.
One initial observation, though, is that having a brand name can apparently help a venture capital firm pull through. Catching our eye was a comment by one of investors in Accel's latest fund, its ninth. Managing Director Michael J. Kelley of Hamilton Lane told VentureWire: "Accel is one of the premium names." He added: "The firm has a brand name and a brand value that attracts entrepreneurs." He said nothing about performance, it seems.
But another observation is just how much money is sloshing around the valley. We already reported how much money was raised last quarter, relative to the money invested. We hear from a good source that Accel actually turned down some investors. This is significant because it suggests investors, both outside and inside the valley, still want to channel boatloads of money here -- and venture capitalists are griping about what that means for their returns. Too much money chasing too few good start-ups means entrepreneurs will get the upper hand in negotiating terms with VCs. It may mean that too many mediocre start-ups get funded; this arguably isn't good because they'll create artificial competition for the good start-ups -- and bring profits down for everybody.
Finally, despite its interest in Asia, Accel hasn't earmarked any percentage of its fund for direct investments there. Accel did invest this year in UUme, which is a Chinese competitor to Friendster. And Silicon Valley-based partner Ping Li is responsible for monitoring its progress. But it's probably an exception. Accel is more interested in investing in Silicon Valley start-ups, and then pushing them to enter Asia markets and outsource where possible. Breyer spent four weeks in China this year, partly because of Wal-Mart's March board meeting there (Breyer is on the board). He's trying to sort out between the short-term cycle of investment fever in China, and the real long-term opportunities. He told us a few weeks ago, "like in silicon valley, there will always be a boom and bust cycle (in China)." Still, he believes that many of the most innovative new technology companies will be created in Shanghai and Beijing.
UPDATE: Thanks, Jeff, for the link to the VentureWire article (below). I'll try to do a better job of getting those in, even if subscription is required. We note, too, that the article's source for the -23% IRR is the University of Illinois. But strangely, Accel says Illinois was never a "direct" investor. We'll try to get to the bottom of this soon (problem with U. of Illinois data is that, while public, it isn't immediately accessible online, at least to my knowledge).