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Why A VC Would Abandon the Web

I read this profile of the profile on the famed venture capital firm Kleiner Perkins and really found it to be pretty non-surprising. The gist of the article is that Kleiner is no longer interested in investing in web technologies and instead focusing on cleantech and biotech. I'm acutally shocked that more VC's haven't made the same decision.

In my mind, the standard profile for a venture capital investment is an early stage company in a capital intensive business that needs cash and guidance to grow and take advantage of a large market opportunity. Think Andy Grove in the 60's needing to build a chip fabrication plant to take advantage of the growing need for semiconductors. That's a VC deal. Need big dough - but if you do it right, big returns follow.

When the web started, lots of online companies qualified as well. 10 years ago putting together any type of web site required lots of hardware, lots of bandwidth, lots of marketing spends (Super bowl ads, print ads, etc.) and lots of people. And since the web wass new, the ROI was there as well. If you create the definitive auction site, the definitive online payment system, the definitive ad network, etc., you win and big bucks follow. Again, a perfect VC investment.

But as we all know, these days times are different. Start-up costs are much less - we launched Topix (at the time, 150,000 or so topical news pages from 2,000 or so sources, continually updated) with a handful of servers. Accordingly, returns are smaller too. The winners of the web have staked their claim. Sure, there are some wins to be had, but for the most part they're smaller. Topix sold for $60M - big win for us, small for a VC.

Why do VC's need big wins? Because like everyone else, they're measured by competition. If you are a potential investor in a VC fund, the ROI on your investment amount needs to be commensurate with the risk you are taking. With the web, the lower return I mention above is commensurate with lower risk. Lower risk, lower return - well, now a VC is competing with all sort of other investment vehicles - and likely ones with better liquidity.

So what does a smart VC do? They go back to basics - back to their original model. Big costs, new markets, big upside. That's what their investors want. So Kleiner goes cleantech and biotech? Makes sense to me.

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