Sonsini, Quattrone and Schlein on the Future of VC Exits

It's no secret that venture capitalists are having a hard time selling the the start-up companies they've invested in. It's really been the status quo for much of the past 10 years, ever since the dot-com bubble burst (10 years ago this month, to be precise).

Venture capital doesn't work if the VCs can't sell their companies -- exit, in VC parlance -- for a lot more than they originally invested. They don't have to turn a big profit on every company they back, but they have to have enough winners so that overall, they can double or triple their money over time.

Lately, though, VCs haven't been able to generate enough exits, meaning that they are still backing thousands of small companies they would rather sell than hang onto. It's the subject of cocktail party talk as well as serious analysis -- including this recent panel discussion.

The names of the panelists themselves should make you sit up:

• Larry Sonsini, the fabled tech industry lawyer


• Frank Quattrone, the fabled tech industry investment banker


• Ted Schlein, managing partner of legendary VC firm Kleiner Perkins

Here's my favorite part from the report on the panel:

Back in the 1980s and 1990s, big names like Morgan Stanley and Goldman Sachs each held between 5% and 10% of the technology IPOs, while the remainder was shared among "boutique" firms such as Hambrecht & Quist, Robertson Stephens, Alex Brown, L.F. Rothschild and Montgomery Securities. "The VC community was pleased to trust those [smaller] firms with book running some of their best offerings, like Sun Microsystems and Adobe," Quattrone said. "Today, it seems like the feeling is if Morgan and Goldman won't take your company public, it's not worth it. It's like saying, if you can't get your kids into Wharton or Stanford, they might as well work in the coal mines."

One solution, according to him, is to use this generation's boutique brokerage firms to lead smaller IPOs for smaller companies. "About half a dozen brokerage boutiques are perfectly capable of taking companies public and are willing to do smaller deals," he noted, pointing out that he didn't have an axe to grind since his firm does not do underwriting."[It] just comes down to some trust," said KPCB's Schlein, whose company is among the bigger VC firms. "The mid-bracket banks can get companies public ... [and] they can find buyers for the stock," although the offerings will be smaller. He recommended that firms look at a "two-stage offering." For example, the first IPO might be for $30 million, followed by another $30 million.

The bottom line is that VCs had better figure out to fix the exit problem, or there likely won't be much of a VC industry in the future.