VCs Don’t Want to Make the Big Bets Any More

If there’s one thing that defines the Web today, it’s speed. Everyone wants to get information faster, know things earlier, achieve their goals more rapidly. Services are built to get us there. Life online moves so quickly that ideas and concepts and jokes can come and go in the blink of an eye.
But it’s not just users who think that way. Venture capitalists, it seems, are increasingly being attracted by the speed of the Web — though for different reasons. Some investors are turning away from big longer-term bets — the sort of investment demanded by fields like biotechnology or pharmaceuticals — in favor of shorter-term gains, according to this Reuters report:

Venture capitalists, who make high-risk investments in start-ups, are tired of waiting years for biotech companies to generate real products and be marketable as initial public offerings, bankers said. They’d rather invest in companies that could go public in just a year or two.
“Think of an IPO for an early stage biotech company. You’re 5, 7, 9 years away from revenues and profitability. That’s a big stretch today for most investors,” said Frederick Frank, vice chairman at investment banking advisory firm Peter J. Solomon Company.

In theory, it’s an understandable route for large investors to go down — if they think they can cash in while the going is good. Internet start up costs are increasingly low, and the Web’s scale is increasingly large. With a great team and a bit of luck, a company can go from zero to sixty in just a few years. And what investor wouldn’t seriously want a piece of Facebook’s estimated $50 billion valuation?
But it’s also dangerous and depressing, for a number of reasons.
For a start, it’s bubble talk. Investors, fed up with waiting to make their money in slow-burning markets, think that the Web can offer a fast route to success. The result will be more investors crowding into the market, pushing up valuations, increasing competition and pressuring companies to head to the stock market as soon as possible. That ends up with people making rash decisions based on other people’s perceptions rather than hard data.
In fact, Frank’s comments about revenue and profitability are concerning in and of themselves. Not only haven’t there actually been that many technology IPOs in the last few years, but they are not always from companies who have great financial stability — just look at Pandora, hoping to raise $100 million on the stock market, but still losing money. It’s a mistake to think that getting your social media company or Web 2.0 firm to IPO is the way to short circuit the machine. While early investors may be happy with their chance to cash out, it comes at somebody’s expense: let’s not forget that a company apparently worth $850 million can be just a footnote two years later.
Quick flips are also a symptom of a wider misunderstanding that the market is going to just keep growing. That’s not necessarily the case, as this terrific essay by Barbarian Group’s Rick Webb points out. He argues that so many of today’s web businesses are predicated on stealing a portion of advertising revenue from elsewhere — but, in fact, the market just isn’t that big, nor is going to simply get significantly bigger every year until the end of time.

You look at Google, and you think to yourself “oh man you can make a giant business out of advertising!” This line of thinking is usually accompanied by a chart showing the migration of advertising money from traditional channels to online channels, and they say “look how much more there is! It’s moving over at the rate of $6 Billion a year!”
Okay, stop. No it’s not. This is going to level out eventually. Do I have a chart to prove it? No. But it’s just common sense. Advertisers are going to stop advertising on Glee? Mad Men? American Idol? Viewership erosion has ebbed, TV has stepped up to the new competition and started making awesome shit. The first, easy places for innovation – yellow pages, classifieds – are levelling out, and while brand advertising spend is growing online still, it will never get all of it, since, well, the net still sucks for brand advertising* compared to TV and Outdoor.

The decision to quit life science for the speed of the Web also shows something more fundamental, too: a lack of ambition.
If everyone wants to turn their investment over quickly, how does one change the world? Sure, funding the next big gamified social travel discount app might earn you a few dollars, but is that what a VC wants written on his or her gravestone? The truth is, focusing on quick sales and early stock offerings isn’t the way to create the really big wins — but the lure of the exit is strong.
Look at the gilded history of venture capital, from Fairchild Semiconductor, Apple, Genentech, through to companies like Google (s goog) and Amazon (s amzn). Those businesses didn’t rush. They took their time and made a killing. Of course, investors are in it to get good returns and nobody can tell where to spend their money or time. Perhaps we’re moving away from the model where VCs spread their bets around many different companies in the knowledge that most will fail, but just one or two might turn out to be amazing successes. But if everybody stops dreaming big, then what are we left with?
Fortunately, not every VC thinks that ditching biotech and focusing on the Web is a great idea — Fred Destin of Atlas Ventures called the Reuters report ”idiotic and nonsensical” and says he strongly disagrees with the idea of moving out of life sciences. I think he’s right: I just hope other investors do, too.