The trouble with Venture Capital?

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Aw, shucks: the VC industry is in trouble — at least if this Technology Review article is to be believed.

The real problem is not complex: there’s too much venture capital, and there are too many venture capitalists, for the industry to be really profitable. The industry as a whole now has about $200 billion under management, more than twice what it did in 1998, and venture funds invested $20 billion to $30 billion a year for most of the past decade. And on the level of individual funds, huge amounts of capital combined with falling startup costs have, in ­Anderson’s words, made funds “muscle­bound”: a $500 million fund can’t make too many small investments, even if that’s what would make economic sense, because the partners don’t have the time to supervise hundreds of companies. (This is one reason, along with the desire to limit risk, that many VCs have started to wait until later rounds to invest.) In the absence of another bubble, there’s no way for new companies to generate profits big enough to provide a reasonable return on $20 billion to $30 billion a year. Kedrosky, for one, argues that for the industry to consistently generate competitive returns, annual investment and money under management need to fall by more than half. And while Wilson describes himself as “very optimistic” about the coming decade, he says that the industry “needs to return to the size and shape it was in the late ’80s and early ’90s.”

The interesting thing is that this diagnosis is not especially controversial. Most people in the industry think there’s too much money. It’s like traffic, though: everyone thinks there’s too much of that, but no one wants to take public transportation. And while in most businesses competition takes care of the problem by forcing the losers out, here winnowing takes much longer, because venture capital isn’t like the stock market: if you get disillusioned, you can’t just pull your money out of it. The limited partners who invest in venture capital funds make long-term, binding commitments to meet the “capital calls” of the general partners who manage the funds and make investments. This is, from the perspective of innovation, venture capital’s great strength: instead of needing a quick return, it can afford to build companies. Nonetheless, it creates what Wilson calls “a huge amount of latency in the system.” So even though the industry has been moving toward a more sensible balance between money under management and potential returns, it takes a long time to push underperformers out.

This suggests that the industry as a whole still has at least a few years of underperformance ahead.

Travellers in East Anglia are often puzzled by place names like “Adventurers’ Fen”. In fact they are throwbacks to the first wave of ‘Adventurer Capitalists’ — i.e. the people who put up the money to pay for the draining of the Fens.

The glossy mag as App

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I’ve long thought that publishing on the Web won’t provide a sustainable business model for magazines, for two reasons: (a) the paywall problem; and (b) the fact that the Web can’t provide the ‘immersive’ reading experience that high-end magazines require. (Some interesting research by the Economist suggests that, in may of their markets, subscribers ‘make an appointment’ with themselves to set aside time every week to read the magazine.) One possible inference is that classy publications stand a better chance of flourishing in an online world if they’re Apps rather than sites. Taking this route addresses the paywall problem (Apple collects the dosh via iTunes store); and it may enable designers to create reading experiences that are more immersive than web browsing. This report suggests that Conde Nast, at least, is beginning to think this way too.

Condé Nast’s plans for the iPad tablet computer from Apple are getting firmer.

The first magazines for which it will create iPad versions are Wired, GQ, Vanity Fair, The New Yorker and Glamour, the company plans to announce in an internal memorandum on Monday.

GQ will have a tablet version of its April issue ready. Vanity Fair and Wired will follow with their June issues, and The New Yorker and Glamour will have issues in the summer (the company has not yet determined the exact timing for those).

The company already sells an iPhone application for GQ. That has sold more than 15,000 copies of the January issue and almost 7,000 of the December issue.

Condé Nast plans to test different prices, types of advertising and approaches to digitizing the magazines for several months before wrapping up the experiment in the fall. “We need to know a little bit more about what kind of a product we can make, how consumers will respond to it, what the distribution system will be,” said Thomas J. Wallace, editorial director of Condé Nast.

The magazines were chosen for their range, he said. “They are representative of the company, right? GQ is men. Glamour is women. Vanity Fair is a dual audience. The New Yorker is unique with its periodicity, and therefore it’s also more news- or text-heavy, and it’s a slightly older audience,” Mr. Wallace said. And Wired has already been working on a reader project with Adobe, the software company that provides publishing tools to much of the magazine industry.

Other than Wired, the digital magazines will be developed internally. “We’re taking a two-track approach partly because we want to learn everything that we can,” said Sarah Chubb, president of Condé Nast Digital.

During the test phase, the company will sell the digital magazines through iTunes. Wired will also be available in non-iTunes formats. While that means Condé Nast will not have access to consumer data — a valuable tool for its marketing — Ms. Chubb said there were other ways to get that information.

Of course, the implication that — once again — Apple will be in pole position to profit from the marketing data that comes from iPad APP sales.

Gutter press-ups

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Andrew Rawnsley has some stirring reactions to his treatment by the Friends of Gordo.

[One of] the paradoxes of finding myself nose to nose with Gordon Brown and his attack machine. The revelations about his behaviour in The End of the Party have been denounced by the prime minister as lies and attacked by his anonymous mouthpieces as “malicious falsehoods” along with a fruity variety of other desperate denials. The more they snarled, the more messages and calls I received from senior Labour figures wanting to express their solidarity and telling me to stand firm. Some offered very useful tips about how to cope in a cage fight with No 10.

“Gutter journalism” was the abuse which spat from the mouth of John Prescott, a man whose infidelities include having sex with a junior civil servant in a hotel room while his long-suffering and oblivious wife, Pauline, waited downstairs to have dinner with the treacherous and hypocritical toad. Her recent memoir describes how he slunk back to their home in Hull to confess to his adultery before it became public. His security staff preceded him into the house to dump a bag of his dirty smalls for Pauline to wash. I know which of us is better acquainted with the gutter.

That’s the stuff!

The Google Three

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This morning”s Observer column about the Italian convictions handed out to three Googlers.

In the case of the Google Three, however, it’s likely that they will be vindicated because even if the Italian appeal fails, there is always the possibility of recourse to the European Court in Strasbourg, which will take the view that European Union law, as currently drafted, appears to give hosting providers a safe harbour from liability so long as they remove illegal content once they are notified of its existence. The downside of this, of course, is that Google will have to be much more responsive to complaints, which will make it much easier to have videos taken down because the prudent course will always be to “take down first and ask questions later”.

The glory days of YouTube may be coming to an end. And Silvio Berlusconi remains at large.

The Google problem

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Christopher Caldwell is a terrific columnist. His FT essay this week — a meditation on the implications of the complaints lodged with the EU Commission this week by e-Justice, Foundem and Ciao! — is a model of thoughtful analysis, and a good reminder of why the weekend FT is such a good buy.

There is either a big problem with Google or there is none at all. If you believe that Google is engaged in open competition, many of the complaints against it look like sour grapes. The Initiative for a Competitive Online Marketplace, a Microsoft-funded study group, issued a white paper last summer on “Openness and the Internet” that, in one sense, is little more than a grab-bag of gripes. The paper notes that Google “operates in a manner that shields it from scrutiny by the other actors” (as if other businesses do not), that it is hard to gather data on Google advertising campaigns and to make them interoperable with other search engines (which is an inconvenience for Google’s advertisers but not a duty for Google), and that Google’s pricing policies are opaque (ditto). On the other hand, any of these failings under monopoly conditions would be a serious problem.

Google insists that its searches are neutral both in appearance and fact. Its “natural searches” – the ones that match up searchers with the sites they will most likely want to visit – are done through an “algorithm” that measures hundreds of variables, with no human intervention once the algorithm has been designed. But Google also carries “sponsored links” – advertisements – which appear alongside the natural-search results. Advertisers bid to be listed by Google any time a given word or phrase is searched for. And here the business gets more subjective. Google has an interest in making web-surfing pleasant and convenient. It gives “quality scores” – rankings based on attractiveness, ease of use and percentage of original content – to its bidders. So a website with a low “quality score” must bid more to be included. The nub of Foundem’s complaint is that its quality scores inexplicably fell, driving its cost per hit from 5p to £5. Was this because it is also a Google competitor?

Worth reading in full. I’ve written before that Google is “the next Microsoft” in the sense that it’s going to be the anti-trust problem of the next decade. But the issues that it raises will be much more subtle and complex than anything we had with Bill Gates & Co.