Polaris Venture's Metcalfe sees hot spots in turbulent VC world
by Katherine Goncharoff
Posted 02:16 PM EST, Dec-7-2001
TheDeal.com
Technology related to the delivery of video over the Internet will be "the next big thing" in venture capital, according to legendary networking pioneer Robert M. Metcalfe.
"With the growing popularity of MP3 files and audio over the Internet, it's inevitable that video telephone, video broadcasting and video-on-demand on the Web will become more popular," Metcalfe said in telephone interview Thursday. "I'm only connecting the dots."
As the inventor of the Ethernet-the international local area networking standard — founder of 3Com Corp. and as of January a partner with Polaris Venture Partners in Waltham, Mass., Metcalfe's predictions are scrutinized.
Other hot VC investment areas in the coming months, Metcalfe predicts, are any new technologies that improve the networking capability of Internet devices and the broadband access of corporate networks or large area networks.
He is also bullish on nanotechnology, the manipulation and building of tools and micro-machines on a molecular level.
"I have a term sheet on the table right now that we are seriously considering that involves an investment greater than $10 million in a nanotech startup," Metcalfe said.
Metcalfe elaborated on comments he had made as keynote speaker at a Massachusetts Institute of Technology venture capital conference recently.
This year, conspicuously absent from the event — attended by about 400 individuals and 35 venture capital funds, including Atlas Venture, Bain Capital Inc., Battery Ventures, Greylock, Amadeus and 3i Group plc — were talks on the once popular topics of e-commerce, B2B business models or Internet investing.
But certain trends were noted. Among them, venture capitalists said liquidation preferences — that is, who gets which proceeds in the event of a merger, sale or liquidation — have become a subject of heightened interest among VCs as more and more investors find themselves liquidating their investments in the absence of an IPO market.
And they noted a noticeable uptick in the number of deals where VCs demand what are known as participating preferred, or "double dip" shares upon investment. In that scenario, the holder of preferred stock gets a liquidation preference and then shares remaining proceeds with common stock holders.
Other deal trends include the greater frequency of "pay to play" provisions in agreements, penalizing other VCs when they do not step up to fund subsequent rounds in a company. As a result, it has become more and more difficult for VCs to come to an agreement on later funding rounds.
"A lot of preferences are in fact preventing a lot of good companies from growing. Ultimately, they prevent new investors from coming on board, and it's become a disincentive to invest," said Charles Lax of GrandBanks Capital. "What some VCs need to realize is that money is not made by creating a dividend structure that sucks air out of the company."
Lax said his fund is negotiating the closing of an insider round that will allow management the option to buy back equity. That, he hopes, will induce management to expand the company.
Conference participants also pondered the likely downfall of many of their peers. By Metcalfe's accounting, at least 300 of the 500 or so VC firms that sprung up during the Internet bubble years are now virtually dead or will be shortly. |
