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Web 2.0 Expo: Venture Capital 2.0

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A popular and very funny session today was the session entitled “Venture Capital 2.0: Bright Future or Broken Forever?”. This session was moderated by Mike Arrington of Techcrunch who is a former VC himself and current angel investor. It appeared like it could be boring listen to a bunch of venture capitalists talk, but Arrington did a very nice job spicing it up with well-timed insults and jokes. Mike also took the time to hype his new conference the Techcrunch20, check out the link to find out more.

Jeff Clavier – SoftTechVC

Invests his own money normally for under $1 million investments. Actually considers himself to be a bit more like an angel investor than a normal VC> Involved in Dogster, Userplane (which was profitably sold to AOL), and a new gaming platform.

Michael Eisenberg – Benchmark Capital

The overall Benchmark Capital funds manage a few billion dollars, with offices all over the world. Michael is based in Israel. They’ve Invested in ebay, Second Life, Metacafe, bebo, and Yelp.

David Kornik – August Capital

He’s the father of VC blogging with his blog Ventureblog.com.

August runs a 350M fund. They’ve invested in Six Apart, VideoEgg, and Technorati.

Josh Kopelman – First Round Capital

$50 million fund, with primariliy first seed round investments in the $250k-$500k range.
They’ve invested in StumbleUpon, del.icio.us, VideoEgg, Gigya, and Aggregate Knowledge.

Chris Moore – Redpoint Ventures

400M fund, invests in consumer internet. Invested in Ask Jeeves, Excite, Netflix, and Tivo in 1.0 phase. 3-4 years ago refocused to Myspace, Gaia, Buzznet, Right Media, Efficient Frontier, and Leadpoint.

The following is a paraphrasing off the conversation.

Arrington: When you invest small amounts, do you require a board seat? What’s the average first round size?

Dave: In almost every case we end up sitting on the board. It’s more about if it’s an opportunity to build a big business. Just because we have a big fund doesn’t mean we have to invest a ton of money to get involved.

Josh: We average about 350k over the past few years, we participate in later rounds as well.

Jeff: 200k to 1.5M. We act a little like angels.

Arrington: This isn’t going where I wanted it to. I wanted to pit Josh and Jeff against the big guys, so I’ll just force the conclusion I wanted. I was hoping to get at my thought that it’s harder on the big guys now because earlier investors like Josh and Jeff are getting into the best deals first and getting big chunks of the company and then you guys have to really compete later on to get in on the investment.

Jeff: We have participated with the big guys on lots of our deals.

Arrington: Again, the facts aren’t helping me.

Michael: Why would Techcrunch allow the facts to get in the way of a good story?

Arrington: Whatever your next startup is, it sucks.

Jeff: Hold on let me Twitter this!

There were quite a few laughs at this point, and everyone is having a good time giving Arrington a hard time about Techcrunch.

Arrington: When Joe Kraus built Excite years ago he needed to raise a lot of money. Now he raised a very tiny angel investment and got Jotspot started, then took a little more money later on when he needed to scale. What if there is no later round where you bigger guys get in?

Dave: If you make a lot of money off of very small initial investments, it’s fine! We’re paid on successful outcomes.

Arrington: So, if your fund is 350 million, and you have 5 partners, you make a certain amount of money from your management fees. But if you don’t invest all of that big fund, you will have less money under management and make less in management fees.

Dave: It’s not so much about how much we’re managing, it’s more about investing the right amount in companies that end up doing well.

Josh: My first company took 5 million to get a product shipped, second company took 2.5 million, my third took 750k. Now I’m funding companies for a couple hundred K. Now that doesn’t get to scale, you’ll still need more money down the road.

Chris: Mike, your theory has a point. If you’re looking at that $50M sale to Yahoo or Google, you can get there with less money. If you’re looking at the really big ones like YouTube and Myspace, you need more money to get there. The bigger funds have to be more careful and select the ones that can get big.

Arrington: Brand name angels are Josh and Jeff, if they want to invest people take it. The big funds have tons of competition for deals, Geni had a crazy valuation. What do you do?

Dave: Haven’t you heard of Value Add?

Arrington: Do you agree you’re getting squeezed from both ends? You have Jeff and Josh at one end and more competition from deals, on the other end the IPO window is shut.

Arrington: Jeff, I know the return on your portfolio because we’re friends. And it’s amazing. Josh I can guess at yours and it’s also going to be good. It’s natural for you guys to say everything is fine. Chris, are you agreeing with me?

Chris: Yes, it’s hyper-competitive, it’s cyclical. We’re not going to do crazy deals, but you have to just hustle to find the right deals and make relationships with the right people who can make these ideas happen.

Jeff: We have no clue how these things are going to turn out. Of 20 companies, I have a 50-75% kill expectation. So 10-14 companies should fail. I’ve sold three and none have died, but we’ll see in 5-7 years.

Michael – It’s incredibly cyclical. Everyone gets bubbly when the exits happen. You can make the most money when the exits aren’t occurring.

Jeff: It’s also hard now to find the quality workers.

Michael: Google is talked about as the key acquirer, but they are also driving up the cost of engineering everywhere.

Arrington: True, but there are a lot of key people leaving Google that are fully vested and are either for hire or will be starting new companies. That’s exciting.

Audience: What competitive advantages are any of you building to differentiate? Incubators?

Dave: Incubators have failed before, and they continue to fail. We’re investing in a set of people coming together to build a business. The incubator model shares resources, so when the companies want to build out and scale they lose those resources right back again.

Arrington: So besides the fact you hate Incubators, is there anything to do?

Dave: We definitely share information across portfolio companies to try and help them solve common problems.

Josh: We have CEO meetings as well as an e-mail list to handle things like how do you find a good recruiter, what sort of options package do people get, and other common issues.

It then moved on to some random audience questions and ended up as a very laugh-filled session.

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