Whether the venture model is broken remains in debate, but it certainly seems to be in the throes of a cyclical downturn. At least that’s the perception of Tom Simpson, managing partner at Northwest Venture Associates, a 21-year-old firm with offices in Seattle and Spokane, Wash.
The partners of Northwest, which raised a $135 million fourth fund in 2000, are not planning to raise another fund, says Simpson, whose portfolio includes startups Confirma, Sur La Table and SinglePoint. While he intends to continue investing in the Spokane region, possibly through an angel network, Simpson says that he plans to take a break from traditional venture investing, citing concerns about valuation and a slow exit climate. Last week, he spoke to PE Week Senior Editor Joanna Glasner.
Q: What’s changed in the venture market?
The firm started in the 1980s as a vehicle to raise capital to fund companies in the Spokane region. But when I joined in 1995, the premise was that there was tremendous opportunity in the Seattle area, especially with the rise of companies like Microsoft, Starbucks and McCaw Cellular. The area was very underrepresented by venture funds, and we closed three over the next four years.
Our premise was dead-on, and the timing was great. But within a couple more years there were 30 or 40 venture funds in the Pacific Northwest.
Q: Is the venture model broken, or is there just too much money chasing deals?
The question of whether it’s a good model is up for debate. Right now, venture capital may be a questionable investment for three reasons. First, anyone investing in a venture fund is likely getting at valuations that are near historical highs. Secondly, they’re getting in at a time when IPOs and M&A events are few and far between. Thirdly, I think too many of the businesses being funded are evolutionary ideas. They’re not revolutionary. When money is easy, you get a lot of ideas funded that perhaps otherwise shouldn’t have.
Q: Any areas that seem particularly overvalued?
There are so many Web 2.0 companies out there all wanting to be the next MySpace or Facebook, largely with advertising based revenue models, with what seem to be very high valuations.
Q: VCs have been talking about a slow exit climate for a while. Do you see this as a cyclical problem, or are there fundamental changes occurring in the market?
It probably is cyclical and that probably will change. I know Sarbanes-Oxley is a common scapegoat. But truly believe it’s somewhat to blame, both in slowing IPOs and in making it harder for public companies to make acquisitions. It’s all going to come back to equilibrium, and sometime in the next 10 to 15 years, there will be a flurry of M&A and IPO events.
Q: What about now?
We have a portfolio of 16 companies that requires a lot of attention. In terms of new investment activities, I’m going to direct it to places where I see there are opportunities.
Mostly, I’m going to refocus my efforts back to the Spokane area. Spokane is up and coming as its own economy. It will never be another Seattle, but it’s becoming a very desirable place to move to, and it’s attracting a lot of great talent. Putting together a sort of “angel fund on steroids” for the area is a possibility.