"The traditional venture model seems to us to be broken."
That was Steve Dow, a partner with venerable VC firm Sevin Rosen, explaining in 2006 why the firm had taken the unprecedented step of returning more than $200 million in commitments to a fund that it had been raising. The comments sparked intense discussion throughout the start-up ecosystem, with many agreeing that too much money was chasing too few deals.
But there were dissenters, including yours truly. My belief was that later-stage valuations had indeed become frothy, but that there was still value to be found in early-stage investments. And it was only bolstered when I appeared on CNBC to discuss the issue two days later, only to be interrupted by the news that Google (GOOG) had agreed to acquire YouTube for $1 billion (Dow came on later that afternoon, but the ironic juxtaposition was ignored).
But the biggest blow to Sevin Rosen's argument came this week, when data analysis software maker Splunk (SPLK) raised nearly $230 million in its IPO. Not only did Splunk price well above its range, but its shares more than double on its first day of trading. By market close, the company was worth approximately $3.28 billion.
And the biggest outside investor in Splunk? Sevin Rosen.
The firm first invested in 2004, and then participated in a pair of follow-on rounds. By the time Splunk filed to go public, it held a 20.4% stake with more than 16.43 million shares. The position today is worth more than $583 million, which means it nearly returns the entire $600 million Fund VIII that Sevin Rosen raised in 2000 (which featured a -11.7% IRR through Q3 2011, according to CalPERS).
Sevin Rosen still hasn't sold any shares, so the actual distribution may look different, but this deal was already in its portfolio when Dow uttered his infamous words. As one VC said to me today, it now sounds a bit like when U.S. Patent Office chief Charles H. Duell said in 1899: "Everything that can be invented has been invented."
In the aftermath of Dow's comments, Sevin Rosen began to break up. Nick Sturiale, the partner responsible for Splunk and Xensource (sold to Citrix for $500 million), left to join another venture capital firm. Then Sevin Rosen's remaining West Coast partners, including Steve Dow, broke off to do their own thing (although it's never been quite clear what that thing was). The remaining team in Dallas managed out the existing portfolio, and began trying to raise a new fund within the past year. My guess is that it will market hard on Splunk's success, but its past comments and Sturiale's absence could make such efforts a very tough sell.
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