Valley VCs need to be realistic, veteran lawyer John Goodrich says

While the nation reflected this week on the tumult of the past year, one of Silicon Valley’s veteran start-up lawyers weighed in.

By Matt Marshall
Mercury News

John Goodrich, co-founder of the valley’s elite law firm, Wilson Sonsini Goodrich & Rosati, says Silicon Valley hasn’t been chastened enough by the downturn and that prospects are more sobering than people realize.

Goodrich, who began work in the valley in 1968, was one of the speakers at “The Venture Adventure: One Year After,” a conference Tuesday sponsored by Santa Clara University and the Churchill Club. Speakers included several venture capitalists, including Dixon Doll of Doll Capital Management and Nancy Schoendorf of Mohr, Davidow Ventures.

Although others called for a return to basics, Goodrich challenged them and prompted deeper thinking. Sure, he agreed with the rest of the panel’s easy conclusions: The valley does need to return to its roots of patience and hard work. MBAs five years out of school should give up trying to be venture capitalists. And people taking their place should have gray hairs.

But Goodrich vented frustration with the panel’s conclusion that the valley was largely finished with its clean-up: “Everyone’s saying `We’re really good people, and we know how to do this,’ and that it’s time for the MBAs to go off and get a job. They’re right, it is time, but they (the MBAs) haven’t done so yet.”

It was a bit surreal, listening to Goodrich — a paragon of U.S. capitalism — citing the theories of a Russian socialist, Kontradiev, to explain how the valley’s venture community is screwed up.

Every 60 years, according to Goodrich’s reading, there is a period of huge financial speculation and subsequent depression. Sure enough, in the late 1990s, the nation forgot the lessons learned by the prior generation after the automobile revolution. Again, we began to speculate in companies with wildly optimistic business plans. He concluded that we would have to wait 60 more years for the next boom era.

Unrealistic expectations still pervade the venture community. Goodrich has two VC friends who have bought “huge jet aircraft,” confident that the tech market boom is an ongoing phenomenon. “It’s not coming back,” Goodrich said.

“I do think there’s a fabulous business called venture capital. It doesn’t make that much money, and it takes hard work,” he said. “They still don’t get it.”

Many VCs still are looking to invest in companies and take them public in four to five years, with smashing success. It will likely take a lot longer.

Other panelists chimed in. There is still plenty of venture money — maybe too much — sloshing around in the valley, and the panel agreed with Goodrich that much of it is in the wrong hands.

One who should know was Kelly Williams, a fund manager at Credit Suisse First Boston, who oversees her bank’s $8 billion investments — much of it in Silicon Valley’s VC firms. The valley’s better firms have given surplus money back, but that returned money only accounts for about $4 billion out of a $50 billion or so of the total overhang.

Her conclusion: The majority is still being managed by people with too little experience. While established VCs have marked down the values of their portfolio companies, many of the new, younger VCs haven’t. “We’re anticipating another round of clean-up,” she said.

The reasons for the capital excess haven’t gone away. Asian and European investors are seeking alternative places to put their money. They’re giving it to VCs who don’t really know where to invest it, she said. For lack of alternatives, VCs are moving “like sheep” into life sciences, which Williams calls the latest “bubble.”

Still, Goodrich sat with his head down, while his fingers stroked his closed eyes — impatient, it seemed, with his colleagues. He kept stretching further back in time to find normalcy. Many people use the year 1998 to mark when market sanity vanished. Goodrich disagrees; he suggests the yardstick is more like 20 years ago.

He recalled going to board meetings with the pioneers of Silicon Valley VC, Arthur Rock, Frank Chambers and Jack Melchor. They were nothing like 1998, or even 1995, he said. “Board meetings went on all day,” Goodrich recalls. “People took their ties off. There was a lot of hard talk.”

Recently, he said, people have confused entrepreneurs with promoters.

How about John Doerr, at Kleiner Perkins Caufield & Byers, who is widely considered one of the most successful — but promotional — VCs in the valley? “His strength lies more in this capacity to promote,” Goodrich responded, noting that he doesn’t want to offend anyone. “That’s a bit of a different skill than is needed today, and better suited for the era between 1995 and 1999.”

There were other signs that people still haven’t woken up, he said. Cisco is a “fine company,” he said, and its stock has fallen from $80 to $15. That’s still 50 times its earnings, which Goodrich thinks is too high.

People shouldn’t be holding on, hoping for a significant comeback. It’s not coming, Goodrich said. “The point is, we have a lot of work to do yet.”

http://www.bayarea.com/mld/bayarea/business/4055769.htm