Bill Davidow on risk taking and today’s startup innovation

In the years sinceBill Davidow co-founded Mohr Davidow Venturesin 1983, venture capital has changed dramatically.

A period of capital scarcity has turned into an era of capital abundance, and hundreds of millions of dollars pour into big rounds. Powerful new companies, such as Google and Facebook, define the Silicon Valley landscape and benefit from new internet-focused business models.

For Davidow, 83, the increase in investor competition has altered some of the industry’s fundamental tenets of risk-taking, with likely pressure on returns. VCJ recently had the chance to speak with Davidow. An edited transcript of the conversation follows:

Q: Venture has changed a great deal since you first became involved. What do you make of today’s environment?

A: Early on we used to invest with the idea you would put small amounts of money in upfront. You would de-risk the deal and then, when you had things fairly well formulated and you understood a fair amount about the market, you would invest heavily in the things that made it through those screens.

In those times, my friend Tom Perkins (co-founder of Kleiner Perkins Caufield & Byers) used to say, ‘get the risks out early before the money goes in.’

Today, what I see happening is large amounts of money are going in before the risks are being taken out. That’s the competition in the market with so many dollars. As a result, you’re going to see lower returns. But there are lower returns everywhere, so the question is, whether the illiquidity risks are adequately being compensated.

Q: In terms of startup innovation today vs. when you were an active investor, is it more or less substantive?

A: When I was investing, we were frequently creating new products for new markets. They had lots of spinoff effects. You created an integrated circuit and pretty soon you got a PC. Today what is really different is that most of the internet-based investing, where the really big market values have been created, is in what I would call displacement opportunities.

For example, Airbnb is displacing a hotel. Uber is displacing various forms of public and private transportation. You’ve got Google, it has a terrific search product, but it really is replacing a lot of the news services.

Q: How are displacement opportunities different?

A: In my day, investments had a lot more downstream spinoff opportunities that were really large. We did the transistor, which led to the integrated circuit, and then prices in our business went into precipitous decline.

But still the semiconductor business grew at 20, 30 percent a year. On top of that, you went from mainframes to mini computers to PCs to smart phones to the internet of things and suddenly you created trillion-dollar spinoff opportunities.

I could say the same thing about the internal-combustion engine, which created massive spinoff opportunities. It created the suburbs, it created the shopping malls, it created the need for gas and oil.

What’s different today is, I don’t think the investments are creating the follow-on opportunities of that scale.

Read the full article on PE HUB – Venture Capital Journal.

For more information on Bill Davidow, click here.