Before Schlein spoke, Andrew Metrick of Wharton had a really interesting comment which in just a couple sentences makes it clear why VC in the US is truly a 'broken model'.
Starting in the early 1980s, when the industry started to grow, we saw about 500 companies a year receiving venture capital funding for the first time, and that number held remarkably steady from the early 1980s through the mid 1990s. [During the same period,] somewhere between 20% to 30% of the companies that received initial financing eventually went public. Beginning in the mid 1990s, we really saw an explosion of companies receiving first-time financing, and toward the end of the decade, as everybody located in the [San Francisco] Bay Area will know, there were a whole lot of companies going public as well, but not nearly enough to keep pace with that old percentage. So between 1998 and 2000, roughly 2500 companies received first-time financing per year. From 2001 through 2003, and those three years put together, we had about 80 companies that were venture backed go public. So we are looking at numbers that are very much in the low single digits.
What more do you need to know? Schlein on India & China as labor arb:
China and India, in particular, originally started for us as labor arbitrages: smart, inexpensive labor. At one point in time, India was a six-to-one arbitrage in labor cost. Then, the big guys moved in. IBM set up shop there and drove all the prices up, and now it is about a three to one, just to give a little perspective for you. And slowly, with the rise of the middle classes in these countries, they have become huge markets of their own.Then he talks about the lack of VC experience in China - but what that really means is a lack of operating experience:
Wow, didn't realize it was that bad. 25 of 39 tech IPOs at or below issue price. And this is when times are supposedly good!
Most of the venture capitalists in China are ex-investment bankers. I am generalizing [based on my experience there], but most come from a finance background. A large number of the venture capitalists here in the United States come from operating backgrounds. Certainly every one at Kleiner Perkins has an operating background. I spent 10 years building a software company before coming to do venture. What this has used is a very transactional point of view over in China--what I think is kind of a scary point of view. Everything is about the IPO. And in venture, we like to think of ourselves as company building. We are here to build a company, and an IPO is an event that takes place--yes, it is a way for us to get compensated eventually--but it is not the endgame. It is actually part of the first-third game, if you will. And quite honestly, statistically, we make far more money post-IPO than we do prior to an IPO.
So, growing these companies is not a mentality there. It is about getting a company public. There are a couple of problems with that. There have been 39 Asian tech IPOs since 2000. Of those, 25 trade at or below their asking price, most below. That doesn't show a whole lot of attention to the future--the building of the company. Capital markets will wake up to that eventually, and a backlash will happen. It is also indicative of something else that I see a lot of: The talent pool cannot absorb $3 billion in investments yet. There is not enough management yet. …There are a whole lot of really smart folks over there, [but] they work really inefficiently, and there is not a lot of accountability. And this is a problem.