Lawrence Aragon

Maybe the VC model is broken after all. The VCs who backed hot digital video recorder maker Pure Digital Technologies Inc. have agreed to sell the company to Cisco Systems for $590 million in stock. At first, it sounds like a pretty good deal, but you have to understand that the VCs put $95 million into Pure, which makes the Flip digital video camera. Assuming they own half of the company, that’s a return of just over 3x their money. For a middle-of-the road VC firm, that would be a decent return, but for big name backers Benchmark Capital and Sequoia Captial that’s pretty much a dud.

In the more-bad-news-for-VCs file, the cash cow known as Google has been deliberately inactive on the the M&A front because it's waiting for "prices to get better," according to CEO Eric Schmidt. Silicon Alley Insider reports that Schmidt told the Morgan Stanley tech conference conference today that Google's M&A activity is "pretty inactive right now" because "we've largely been waiting for prices to get better." Yes, you read that right. The company that had $15.85 BILLIOn in cash, cash equivalents, and short-term marketable securities as of Dec. 31, is worried that it's going to overpay for a startup.

We first reported back in November that VCs were slowing down on their pace of investments. Well, I just ran some numbers for a colleague at Reuters, and the situation has gotten even worse. U.S.-based venture firms invested just $1.3 billion in 205 companies in January, down from $4.5 billion invested in 466 companies in January 2008, according to preliminary data from Thomson Reuters.

Silicon Valley venture firm Accel Partners and Accel's Jim Breyer are "strategic partners" in the new venture capital fund being raised by Netscape co-founder Marc Andreessen, peHUB has learned. Andreessen and Breyer both sit on the board of social networking company Facebook. Andreessen joined the board last June, while Breyer led the company's first venture investment back in April 2005. Andreessen first disclosed his venture effort, called Andreessen Horowitz, last week on the Charlie Rose television talkshow. His partner is former Opsware executive Ben Horowitz, with whom Andreesen has a history of angel investing.

San Francisco venture firm Alsop Louie Partners is out raising its second fund, according to today's Private Equity Insider (subscription required). If this news sounds familiar, it should. peHUB sister pub Private Equity Week reported last June that the early stage investor planned to hit the fund-raising trail early this year. We put in a call to co-founder Stewart Alsop, but he said he couldn't comment due to SEC restrictions. PEI is reporting that Alsop Louie is trying to raise $75M-$100M. Its first fund, raised in 2006, weighed in at $75M.

The venture capital community has closer ties to President Obama than any other previous president. That could bode well for an industry that has been stuck in a slump since the dot-com crash. Brad Spirrison, a Chicago-based writer who has followed Obama's career closely, penned a great story in this month's Venture Capital Journal about the new president's interest in venture capital. Entitled "Real Change: New President Gets VC," the story begins: Steven Lazarus had just sat down after accepting a lifetime achievement award from the Illinois Venture Capital Association when he was approached by an up-and-coming state senator with an unforgettable name. It was December 2003 and Barack Obama—who was in the middle of an uphill battle for the U.S. Senate—decided that the most important place to be was the IVCA’s annual awards dinner.

Venture capitalists are gloomier than ever about their prospects. The Silicon Valley Venture Capital Confidence Index hit an all time low of 2.77 in the fourth quarter. (The survey ranks confidence from 1 to 5, with 1 being the lowest.) It was the fifth consecutive new low since the index began in the first quarter of 2004. The index is compiled by Mark Cannice at the University of San Francisco. He contacted 33 San Francisco Bay Area VCs and asked them about their outlook for the entrepreneurial environment for the Bay Area over the next six to 18 months.

I was encouraged to read that our new president is meeting with the CEOs of 13 major companies today (IBM, Google, etc.) to talk about the economy (see list of CEOs below). I would be really impressed if Obama organized a similar powwow with venture capitalists. Who better to give him insights about innovative technologies that could use a boost from the stimulus package now being considered in Congress? Pumping hundreds of billions of dollars into the economy will certainly give it a boost, but it will only be short-term if those dollars aren't focused on areas that will pay long-term dividends. For example, I'd rather see Uncle Sam take the $1 billion it plans to give to Amtrak and put it into infrastructure projects to connect far-flung solar installations with the electrical grid. Venture capitalists are the best businesspeople for Obama to consult on this issue. They have deep insight into clean technology because they constantly meet with startups on the cutting edge, but they also have a pragmatic outlook because they are charged with returning money to their investors.

Allegis Capital is one of those venture firms that you don’t hear much about. It just quietly goes about the business of making money. It’s had some big exits in the past few years, including the sale of IronPort to Cisco for $830 million in 2007. In fact, Allegis has made it a point to focus less on taking portfolio companies public and more on positioning them for sales—which makes it well positioned in the current environment. The seed stage investor is sure to play up its M&A success now that it’s out pitching its sixth fund, which has a target of $150 million to $200 million. (Private Equity Week broke the news on Monday.) I recently spoke to Bob Ackerman, who co-founded Allegis back in 1995. He couldn’t confirm or talk about fund-raising due to SEC restrictions, but he had some interesting things to say nonetheless, particularly about venture firms that are crying in their beer about the lack of an IPO market.

In the More Bad News Department, UK TechCrunch is reporting that Morten Lund, the Danish VC who famously invested in Skype, has declared bankruptcy. Venture Capital Journal was the first U.S. publication--to my knowledge--to do an in depth profile on Lund, who is quite a character. You can read Alex Haislip's excellent profile here for free: Archangel. We hope Lund bounces back. The world needs more risk takers like him.