Interview: George Zachary, Partner At Charles River Ventures, On The Google Effect In VC

This story was written by Rory Maher.

It's a tough funding environmentfunds may actually flow out of VCs over the next few years. What are you hearing from your limited partners?

The consistent thing we heard from our LPs was this was going to be the first real period of venture shakeout where people who haven't actually returned capital to us and done distributions and shown that they can operate as a profitable venture manager, we're going to terminate our relationship with those firms. When I asked what that meant, they said there are probably 30 out of 1,000 firms that have had profitable returns over a 10-year period.
I think they're under pressure because there are significant cash-flow issues in their own businesses and they realized they didn't want to blow more money in venture. I think the other thing is the 10-year return in venture was finally negative.

Why do you think only 30 out of 1,000 are profitable and the 10-year rate of return has been negative?

There are very few companies that significantly disrupt and change the market, and it shows in the results.

Does this mean there needs to be less venture funds chasing better deals?

I think there is so much money in the asset class there is almost a lottery-ticket phenomenon. People wanted to invest in venture because they thought they might have the chance to invest in the next Google. I think one of the big differences between the '90s and the last decade was that in the '90s you really didn't see these "black swan" type occurrences, either in the positive or negative direction. There was nothing really like Google until this decade, and part of the reason is that the majority of the world didn't have broadband.  ... The main reason is because there was all this funny money created by low interest rates .. I know that we would get random calls from groups who would call us and ask to invest in our funds without even having met us.

To go back to Google, can you be more specific about how that led to the lottery phenomenon you were talking about?

There was an explosion of profitability with Google where instead of 10 to 1 or 100 to 1 returns, investors got 1,000 to 1 or even 10,000 to 1 returns that led to this mania where people were like "I'll buy a lottery ticket" to chase that legend.
 
I'm sure you read about Greylock moving its headquarters from Boston to Silicon Valley.  Was it just a simple move or was part of a bigger statement about the viability of the Boston as a VC hub?

The Boston area continues to be a good area for venture, but there are still way more opportunities in Silicon Valley than in the Boston area. I think it's been that way for the past 10 to 20 years so I don't think there has been any significant change. New England tends to focus more on complex systems than things that can be very high volume in the sense of semiconductors or the amount of users they have. They don't tend to be really complex engineer or technology wise.

Does it seem like there is a greater VC presence in Boston than New York?

That's true.

Why is that?

ew England is much more centered around technology and New York has always had finance and advertising.  Also, there is no MIT in New York.  I'm not saying there aren't smart people, but there is no place like MIT where there are super-uber smart engineers and computer scientists congregating where they can graduate, rent some cheap place down the block then raise some venture capital. Also, with the large amount of hedge-fund money and other money being traded, in many cases the amount invested in venture for the potential return is not on the radar of large financial firms that work with far larger sums of money that is being traded every day.

On Wall Street there is a saying that goes "an investment is a trade gone bad" whereas in venture capital it's the exact opposite. A trade is an investment gone bad.

You're an investor in Twitter, and it's been interesting not only to watch it grow so rapidly but also to see a lot of other startups popping up around Twitter.  Do you see a growing eco-system continuing to build around it, kind of like how applications are continuing to grow around the iPhone?

I think as long as Twitter continues to have user growth there will be new applications being built around it.  The question is whether they can keep it up.  What they've effectively done is create a new name space. It's like a new kind of domain name except it's per person. 

As you look to invest in these Twitter ecosystem companies, what profile are you looking for?

We look at all the Twitter products that pop up around it and generally ask first what the business model is going to be and most don't have a very good answer. I wish they did, but some of them say advertising. The tweety guys the leading mobile client for Twitter on the iPhone they charge I think $2.99 per copy and I don't think they have many problems selling it.  The question is whether any of them can be big businesses, and to me it feels like the Facebook app phenomenon again.  Many of them are loss leaders that get people to use Twitter, but we haven't seen any that can be big businesses on their own.

By Rory Maher