Seems a paucity of IPOs and lackluster returns on investment have caused VC money to dry up. This does not bode well for an industry in what NVCA President Mark Heesen likes to refer to as a “Darwinian contraction”; “You are going to see a reduction in the number of firms, but more important you will see a reduction in the number of venture capital professionals,” Heesen told Reuters.

What is it that Sequoia Capital partner Michael Moritz often says? “The best time to invest is when people are cowering under their desks.” Hmm. Something like that…

That’s not great, but it’s a marked improvement from the 2.77 the Index registered in the fourth quarter–its lowest point in five years. Why the sudden change? “While concern over the state of the national and global economy and financial system remains, a sense of foreboding appears to be giving way to an expectation of eventual, if slow, recovery in the high-growth venture environment,” Mark Cannice, the author of the survey explains. “This mustard seed of hope appears to be taking sprout among a majority of the venture capitalist respondents who provided their insight to the March 2009 survey. And it is nurtured by venture capitalists’ faith in the resilience of entrepreneurs to build efficient enterprises with disruptive solutions, more modest expectations for growth and valuations, and the early stages of a stabilization in the financial system.”

In short, no reason at all. The economy is still deteriorating, perhaps less quickly than it has been, but deteriorating nonetheless. And venture investment is still declining. But there’s a sense that things are going to get better. And they surely will. Certainly, it’s not too difficult to do better than no IPOs two quarters running. And, as Sandy Miller of Institutional Venture Partners reasons, an economic environment like the one we’re in often gives rise to disruptive new technologies. “While the environment seems gloomy with no end in sight we need to remember that some of the best companies have been founded and built during bleak times,” he said. True entrepreneurs will continue to find ways of moving their ideas forward. From a venture investor standpoint 2009 and 2010 should be an attractive environment for new investments though there will be little liquidity for existing investments.”

As Sequoia Capital partner Michael Moritz often notes, the best time to invest is often “when people are cowering under their desks.”

[Image Credit: VC Wear]

“We’ll be focusing on early stage investments across a diverse range of industries, including consumer Internet, software, clean-tech, bio-tech, health care and, no doubt, other areas we haven’t thought of yet,” Managing Partners Rich Miner and Bill Maris explained in a blog post. “Central to our effort will be our fellow Googlers, whom we view as a critically important resource to help educate us about potential investments areas and evaluate specific companies.”

Presumably, then, the scope of the fund’s investments will be as diverse and, ahem, fascinating as the whims of Google’s leadership. Which isn’t always a good thing. That said, Google Ventures may do much to help the company innovate itself out of this downturn and perhaps even spot and engulf the next Google (GOOG) killer before it has a chance to live up to its namesake. As Google Ventures explains in its FAQ, it’s not above engulfing a company it’s incubated. “Acquisitions by Google of portfolio companies are possible, but this is not the goal or focus of our investment activities. Our focus is building great companies and generating long term financial return.”

Obviously. But for Google, right?

[Image Credit: Ignorance Is Futile!]

“This is forming to be a perfect storm for the venture capital industry that may result in a significant contraction of firms and capital,” explained Steve Carnevale of Point Cyprus Ventures, who believes institutional investors will eventually put less money into venture capital. “This storm has two fronts. The U.S. economy and the long investment cycle associated with life sciences and clean tech. First, the economy as a whole. The U.S. is bankrupt as a country as a result of massive borrowing that has grown over 30 years. This borrowing created an inflated investment portfolio that made available capital to tertiary alternative investments like venture capital. We are at the beginning of a massive de-leveraging that has unprecedented consequences for the economy and the venture capital industry. … The industry will contract not only because of overall economic weakness, but because the fundamental investment cycle will be dramatically longer. … Now the majority of venture capital is going into life sciences and increasingly clean tech. These types of investments will take longer to produce returns then in the traditional VC investments in the computer industry. When institutional investors figure that out, they will reduce their capital availability for this kind of alternative asset. … Therefore, the VC industry will get sandwiched between the economy and it own fundamentals.”

Ugly times for venture capital. That said, as Sequoia Capital partner Michael Moritz often notes, the best time to invest is often “when people are cowering under their desks.” ‘Course it was Sequoia that just held that “RIP: Good Times” meeting last week. …

[Image credit: Sad Guys on Trading Floors]

Marked by panic selling and wet-your-pants fear, it was one of the worst weeks in the financial world’s history–a week that cut the legs out from under Google (GOOG), beat Yahoo until its market cap bled purple and caused the Dow Jones Industrial Average to swing more than one thousand points on an intra-day basis.

It was a week that saw Sequoia Capital warn its portfolio companies to prepare for a protracted downturn or, in the words of partner Michael Moritz, be “spattered on windshields and radiator grills and be forgotten.” Turns out Bubble 2.0 sounds a lot like Bubble 1.0 when it pops.

Beneath the screams of agony echoing across Wall Street, there was other news worth noting:

• Advanced Micro Devices (AMD) announced plans to spin off its manufacturing operations.
• “Legal” turned out to be a poor choice of adjectives for RealNetworks’ RealDVD (RNWK), the company’s new “legal” DVD ripper. A judge extended the temporary restraining order barring the company from distributing it.
• This just in: Time Warner’s (TWX) AOL and Yahoo (YHOO) are still talking about a merger and Generalissimo Francisco Franco is still dead.
  Where is Microsoft (MSFT) in all this? Sitting on the sidelines hoping the deal will go through.
• Finally, activist investor Eric Jackson, the creator of the Yahoo! Plan B investor community, revealed Yahoo! Plan C: his hedge fund’s divestiture of its Yahoo stake.

There is no good news right now, it seems. The bubble is burst.

“It’s pretty clear that demand is going to soften across the board for every company–it doesn’t matter if you’re selling to consumers or companies,” Sequoia Capital partner Michael Moritz told the Financial Times earlier this week. “[Many start-ups that emerged in the recent boom will end up] spattered on windshields and radiator grills and be forgotten.”

[Image Credit: Audiophile & Synergy Industries]

PREVIOUSLY:

• Google’s New Corporate Philosophy: “You Can Lose Money Without Doing Evil”
• Wall Street: Way Down in the Hole
• Analyst: The Great Dark Times Cometh!
• Wall Street: Give Me Something to Stop the Bleeding
• GOOG at $398? Clearly, You’re Dyslexic
• WaMu: Epic Bail
• Ballmer: Better Safe Than Lehman Bros.
• Lehman Brothers: $2.5 Billion for a Bankruptcy Well Done
• Here’s $39 Billion in Recognition for Your Hard Work on the Forthcoming Financial Crisis
• Weekend at Bernanke’s II
• Weekend at Bernankes

(Quick aside: Before the panel begins, the woman sitting next to me is investigating the contents of the TechCrunch40 schwag bags, which apparently include AOL CD cases recovered from an intern-led archaeological dig at the company’s Dulles, Md.Va., campus.)

After introductions, Calacanis poses the first question to the VCs on the panel: How does somebody best get into your office?

Mandel: A referral or introduction from a colleague.

Zachary: An introduction or a very simple email.

Clavier: Introductions, but he admits–perhaps foolishly–that being mobbed at conferences does sometimes work. (Start-up pig-pile on Jeff in the Demo Pit everyone!)

Botha: Likes the simple email idea as well.

Calacanis asks Adelson about his approach to raising capital. “Do you just call the same people and ask for money?” Adelson says you seek out capital from the people most likely to offer it in support of the business you’re pitching.

Same question asked of Sacks. He says Geni did its series A round as an idea and its series B as an actual product. Suggests aspiring entrepreneurs focus their early efforts on the refinement of your idea and your vision. That’s the best way to guarantee a good VC valuation.

Question: How do you determine valuations? Is it all based on your perception of a start-up as bankable and the idea of owning the next five years of its life?

Mandel seems to agree that there’s a logical aspect to these decisions, but insists that there’s also an emotional one as well.

Botha agrees and notes the recent insanity around Facebook’s valuations.

Clavier, a long-time angel investor, then announces a $12 million seed fund. Its focus will be the consumer side of the Internet, with a few dozen deals, ranging from $100,000 to $500,000, over the next 3 years.

Question from TechCrunch40 co-host Michael Arrington: Wonders if VCs are peeved that the angels are swooping in and taking companies that they would have liked to fund away from them.

Botha says of course. But adds that this all contributes to the ecosystem of innovation, yadda, yadda … competition is desirable. ….

Panel descends into pure VC 101 tedium. And then ….

What’s the stupidest thing an entrepreneur has done to get your attention?

Clavier: Clipping your nails during a meeting.

Clearly the high point of the panel. Time to find coffee.

Digital Daily’s John Paczkowski is blogging from TechCrunch40 in San Francisco. Technical difficulties at the conference site prevent him from live-blogging, so he is summarizing with the following report on this keynote panel, dubbed “Humble Beginnings,” in which Sequoia Capital’s Michael Moritz (pictured far right, above) interviews Marc Andreessen (founder Netscape and Opsware, co-founder Ning), David Filo (co-founder Yahoo) and Chad Hurley (co-founder YouTube).

• Moritz asks Hurley (pictured right) to reminisce about his first business years ago in Pennsylvania. Apparently Hurley’s background is in art: He got his start when he discovered the intersection of art and business at age 5, trying to sell plywood paintings.
  (Plywood paintings? Cheaper than felt, I suppose.)



• Filo (pictured left) is asked how he got from Louisiana to California. Answer: Stanford.
  (No kidding! Half of Silicon Valley would likely answer that question the same way. Was Moritz expecting something different?)
• Andreessen (pictured below) is asked about his humble origins in Wisconsin. What brought him to California? Answer: “I wanted to get the hell out of Wisconsin,” (Half of Wisconsin would likely answer that question the
  same way. Kidding.) He adds that he was intrigued by the ideas then driving Silicon Valley.
• Filo asked about how he and Jerry Yang got the urge to bail on Stanford and venture out on their own. “When we first got started,” he replies, “we didn’t think of what we were doing as a business at all.” He notes they were forced to decide between Yahoo and a Ph.D.
• Way back in the beginning, Moritz asks, didn’t Filo and Andreessen have some sort of business relationship? Filo replies that Andreessen and Netscape folks gave early Yahoo a bit of rack space at their data center.



• Moritz then questions Andreessen (right):
  Q: At the beginning of Netscape did anyone have any sense what the
  subsequent 5 years would look like?
  A: No, of course not.
  Q: Were there key moves you made in the first 50 or 60 days that were instrumental to your success?
  A: Initially everyone thought we were going to charge for Netscape. But then we released it for free. That brought us a lot of buzz and a lot of traction as well.
• Moritz to Hurley: How did you conceive of YouTube?
  A: We wanted to solve a problem–online video. We didn’t see it as a business, either.
• Moritz: How often has business gone in a direction you never would have conceived of even in your wildest dreams?

  Filo: Well, Yahoo was one of the first businesses that had no revenue or even future prospects for revenue, so that was pretty unusual. Email, etc. were all relatively unexpected directions for Yahoo which was conceived as a directory. Apparently, every business Yahoo’s pursued has been one that Filo never would have imagined. (Good explanation for Terry Semel.)

  Andreessen: “CEOs are special people.” (Nice. Wonder if there’s an associated public-service campaign: “Hi, I’m Marc Andreessen for CEOASP— CEOs Are Special People.”)

• Moritz: Chad, were you surprised by the issues you encountered as YouTube CEO?
  A: Difficult to transition from developing the product to managing the business. Need to put the right people in place in order to survive.
  (I wonder if Hurley will save that little gem for play on famous
  business book by head of GM…)
  Moritz: Chad, do you remember a time when you worried that you’d lose the business?
  A: There was a time when we were growing far too quickly for the data centers that were hosting us. We were forced to go out and build in order to continue. There are a lot of media companies that feel threatened by us now. We just need to educate them about what we’re doing. There are a lot of media companies that feel threatened by us now. We just need to educate them about what we’re doing. (Bet Viacom CEO Philippe
  Dauman would get a good laugh out of that one.)
• Same question to Andreessen, who obviously has some meatier answers: Rambling history of OpsWare. Long story short, the market crashed, we were sitting there burning cash and so we did a “restart,” we essentially reconceived the company as a software outfit and packaged up and sold the portions that remained. Ironically, it was a great time to start a company, because it was a lousy environment and everyone else was afraid of doing it.
• Moritz poses the next question to the panelists: What are some of the worst decisions you’ve made?
  (Besides agreeing to participate in this panel?)

  Hurley: We didn’t hire fast enough.

  (BZZZT. Wrong.)

  Filo: We never understood the magnitude of the business opportunity ahead of us. We underestimated. That said, it’s not clear that if we had, things would have gone differently. We’ve made some bad short-term decisions that would have benefitted from a long-term view.

  Andreessen: He recalls a period when search engines were paying Netscape to advertise to the traffic that was coming to Netscape.com. “We viewed that as free money. But I always wonder what might have happened if we’d suddenly decided we weren’t a software company, but a content company and suddenly changed our business model.”
  (Netscape-Time Warner, obviously. Duh.)

• Another general question from Moritz: Who in tech do you admire the most these days?
  (Mike Moritz?)

  Filo: Steve Jobs. He cites Apple’s culture of innovation and design and marketing savvy.
  (Damn. Wrong again.)

  Hurley: Steve Jobs. Notes Jobs is a great speaker.

  And you, Marc? Jobs trifecta! Andreesen agrees, it’s Jobs.

  (Five dollars and my pass to this conference says everyone in the audience is silently wishing it was Jobs on stage right now, instead of these three.)

• Wrap-up question from Moritz: What’s the time you’ve enjoyed the most in your career?

  Filo cops out: “Every period, every year had its moments. You could pick any one.”
  (Precious and few are the moments we two can share, Jerry …)

  Hurley: “It’s great when you first start. It’s hard to replace the experience of that time when you didn’t quite know what would happen next.”

  Andreessen apparently opts to deliver his answer telepathically or Moritz skips him, because he’s not given a chance to reply.

• Audience Q&A:

  Tips for start-ups?
  Andreessen: 1. Have a founder who can be CEO. 2. Don’t hire too many people too quickly. Keep the team size small until you identify a product for which there is a market.
  Hurley: 1. Keep your team small. You can iterate faster. 2. Look at how you personally use your product and use that to guide your development.
  Filo: Hire passionate employees.

  Softball question to end all softball questions: What are your favorite Web sites?
  (Rotten.com? Diaper Pail Friends?)

  Filo: Sequoiacapital.com (laughter). TechCrunch.

  Hurley: Facebook.

And that’s the big finish. Off to find coffee.