California: Venture capitalists make their fortunes, or lose them, on the strength of their predictions. As they hunt for barely hatched ideas and nurture them with money and advice, they are hoping that one grows into the next Google Inc.
On Sand Hill Road, the wide boulevard here, where investors study ideas in offices tucked behind palm trees and redwoods, the recession has tempered their optimism with caution.
Conversations with some of the leading venture capitalists about the types of firms that will receive some of the estimated $31 billion (Rs1.5 trillion) that venture capital firms raised in 2008, offer a glimpse at the future of technology.
Venture capitalists once poured money into websites that were free to users and that made money selling advertisements. If the site involved social networking, so much the better. But as growth in ad spending online cools and social networking becomes commonplace, the days of trying to be the next YouTube, Facebook or Yelp are over, said Jeremy Liew, managing director at Lightspeed Venture Partners.
“In 2005, Yelp could say, ‘I’m going to unseat Citysearch,’” Liew said. “Today, someone has to say, ‘I'll be more viral and user-generated than Yelp.’”
Even Accel, an early investor in Facebook, might have turned that company away if it approached the firm today, said Theresia Gouw Ranzetta, an Accel partner.
For websites that do not already have large audiences, “your business model may be just as plausible as it was 18 months ago, but we're all more cautious about giving you a slug of money”, she said. Instead, investors are looking for sites that make money in ways other than selling ads, such as selling subscriptions.
Though investors are shifting their focus from the consumer to businesses, they are still reluctant to back makers of expensive software that manages data for companies.
“Big-ticket enterprise ideas that take $50 million to $100 million to get to market are going to be few and far between,” said Dana Stalder, a general partner at Matrix Partners.
Instead, venture capitalists will invest in open-source software, Web-based software, Internet-based cloud computing and virtualization software that lets companies use less hardware to run applications.
The iPhone and Apple app store caught on with consumers in 2008, but investors are not convinced that selling ads or content such as applications on mobile phones can make much money for them. More sceptical venture capitalists are sticking with what they know makes money in telecommunications, such as carriers and makers of phones and accessories.
“Pure mobile content is over invested, but hardware is under hyped,” said David Weiden, a partner at Khosla Ventures. Revenue from the iPhone and BlackBerry exceeds that of the entire mobile content market, he said.
Venture capitalists are still chasing clean technology. Through September, $3 billion was invested in technologies that create alternative energy and conserve power, up from $1.9 billion the year before, according to the National Venture Capital Association. But big, expensive projects such as building factories to manufacture solar panels or biofuels are falling out of favour. Investors say one sector that technology has not yet transformed is personalized health care.
Jennifer Fonstad, a managing director at Draper Fisher Jurvetson, is looking at firms that use information about a person’s genetic code to offer predictive medical advice or preventive health services or devices.
Internet firms that help patients, banks and insurance firms manage health savings accounts or help people find assisted-living homes for aging parents are other likely recipients of investors’ largesse.
©2009/THE NEW YORK TIMES