What's Next for the Net?

Money Matters

What's next for venture capital?

Paul Saffo: The other shoe is about to drop in the venture-capital world. There may be a bloodbath within the next 12 months. We're going to see very deep turmoil, and out of the failures that happen will come new venture-funding models. There's likely to be a "species radiation" in which different kinds of models with different players find different niches. I think that the process of figuring out how to liberate intellectual capital in large companies has been overlooked. Everybody seems to be blind to the role of big companies.

But big companies still have a huge role to play. Everybody says that big companies aren't hip and that small companies are the way to go. If those startups are very lucky, then they will end up as big and as clueless as the companies that they now disparage. We're in the middle of a shift from an old economy, where economies of scale mattered, to a new economy, where economies of structure are what count.

It doesn't matter how big you are, it's how big you behave. Can you move fast when you need to and behave like a big company when it's necessary? Funding is at ground zero for that shift.

Nirav Tolia, Cofounder and CEO, Epinions Inc.: The recent correction has had two results. First, we're being forced to present a real business story, which is something that we didn't have to do before. Now when you go to raise money, they don't ask about your users or your traffic. They ask about your revenues. They look at comparable companies in the public markets. That shift in focus has forced us to build a real financial model and to say, This is when we think we can be profitable; these are the drivers of our business. Then the entire company focuses on doing the right things, instead of the dream-oriented things.

What I don't like is that there is also a wholesale dismissal of market spaces, types of ideas, and entire opportunities just because they don't happen to be in vogue anymore. There was a time when everyone had a business plan tucked in her back pocket. If you presented it -- bang! -- you could get financed. Now the opposite is basically true. If you say, I'm a consumer company -- bang! -- VCs just don't want to talk to you. You can say, I have a very high leverage model; I'm going to be profitable in a quarter, and they'll say, We don't care; it's B2C.

That's an unhealthy phenomenon. I would like to see more of an equilibrium.

Alan Naumann: I agree with Nirav that funding is driven by trends right now: This is in, that's out; it's black, it's white. I don't think that's very healthy. There are some other things that are happening in the venture community as well.

One is that the pendulum is swinging back to frugality. That's not to say that VCs won't make big bets on companies anymore. But they're expecting entrepreneurs to use the time-tested principles that built great businesses in Silicon Valley in the past. Frugality means saying, Look, we're a small company; we can't spend like drunken sailors until we get some sort of revenue stream. It's not about spending $10 million on your first day on a Super Bowl ad or an Olympics ad.

The other thing is that when we asked our venture friends why they were slowing down, they said something very astute. They said, We're slowing down because we can't add the value that we used to be able to contribute. What these young companies need are great business minds and experience to help guide them away from the rocks and into safe water.

Managerial-coaching skills are hard to come by in the venture community. There are about 200 CEO searches in the Valley right now, on top of 300 CEOs who have been on the job for a year or less. We're reaching down deep into the managerial skill set and experience. If the venture arm is going to be effective at nurturing its investment, it's got to have operational skills. One of the upcoming crisis points in venture is that we need experience. Where is it going to come from?

Ron Ricci: It's also important to consider what skills the venture people bring -- or don't bring. Are there people in the venture community who get what customers care about? That's the critical issue and a skill set that appears to be missing. During the past few years, we've seen some major marketing mistakes. Anyone who thought that those multimillion-dollar awareness campaigns were going to translate into $5 billion worth of customer value was wildly off base.

It's very clear to me that there are a lot of companies that don't understand the difference between raising money and going public and this thing called delighting customers. The critical skill that's missing on the venture side is the ability to help companies understand how to serve customers well and how to keep them happy.